Moves aplenty in the grain complex since last Fridays close has afforded the hedger and spreader phenomenal opportunities for both futures and options trades. Lets examine what to look for going forward. This includes retracement bounces and further liquidations in beans and wheat that potentially could reveal sizable moves in price in the near term as we near one of the bigger crop reports of the year at month end.
Soy Complex: Mondays break of 25 cents in beans and over 10.00 a short ton in meal comes on two fronts. Weather in the 6 to 10 day and 11 to 15 day looks to have wetter rains enter into Argentina. While they maybe too late in some areas, the trade used last Fridays 10 cent jump in price as another opportunity to sell despite Argentina’s continued drop in production by some analysts to 38 million metric tons. (January production estimates were at 57 million). A sizable cut. Second, talk and noise of possible tariffs coming down the pipe from the Trump administration regarding China and the anticipation of their retaillitory response in shunning US grain purchases for South American beans has the market on edge. While I think at the end of the day that the saber rattling is nothing but noise, fear could drive price. If we put the tariff noise aside, its important to note that the US currently has a sizable 555 million bushel carry. While Argentina has production issues, Brazil has grown a bumper crop. Plantings of beans for this upcoming season look to come in 1 to 2 million acres higher than last year. Should the weather issue pass with the worst behind us in South America, and acreage numbers to come in as expected, look for beans to eventually work lower. Funds hold sizable longs now in both beans (200 K) and over (100 K) in meal. Again I have stated to use meal as your trigger.A weekly close under 363 in May meal should push it to 354 with beans moving lower in tandem. However if beans move higher and close over 372, look to be long beans again in the near term.
Given everything here I’m thinking a relatively cheap strangle should be considered using the following on option spreads.
Buy the Sept 1000 put and sell 2 Sep 1160 calls for 4 cents or a $200.00 cost plus fees
Buy the July Soybean Xmas Tree for near term upside: buy 1 July bean 1060 call. Sell 1 July 1120 call. Sell 1 July 1160 call for 6 cents or $300.00 plus commissions and fees
Corn/Wheat
Wheat particularly the KC has taken the brunt of the selling. Corn took a hit as well in the last week but has stabilized as the selling has halted for now as noise of acres in the US could be cut on next Thursday’s report. We noted on our reports last week that if KC couldn’t hold support at 518 and 513 basis May, that it would lose to corn, Chicago, and Minneapolis wheat. Sure enough that has happened. Spreads of note to consider come in as follows.
Chicago wheat vs corn: this spread has broke from 1.31 wheat over to today’s multi week low down at 72.2. We settled at 78 cents today. A sizable three week break. 72.2 is a double bottom and gap fill. Those looking to buy this spread may buy wheat over corn at 76-77 cents over and to look for a retracement bounce to 86.2 over and then a secondary upside target at 95 cents over. Get out on a close under 72 cents as the spread will most likely trade down to 66 cents wheat over.
KC wheat vs Chicago wheat: if spreading wheat vs corn isn’t appealing , look at this spread. The low today was 11.4 KC over Chicago. Major trend line support. We bounce off that level today and went out near 13 cents KC over. Should this trend line hold, buy this spread and look for a retracement bounce to 22 over, Kc wheat over Chicago. Tight stop loss here.
I am examining some options spreads that make sense but none appear at the moment in corn unless one is looking for price protection. The spreads for now in wheat and corn have more appeal in my opinion.
Please join me for a weekly webinar on grains and livestock each Thursday at 3 pm central. Sign up is free and a recording link will be sent to your email.