Grain Spreads

Sean Lusk General Commentary Leave a Comment

The final trading session of 2017 was relatively calm in the grain markets as traders evened up positions ahead of month, quarter, and year-end. We noted earlier in the week that managed money funds in the soybeans have gone from a net long to a net short in the market. The bean oil market after being long over 100 K contracts a month ago, saw sizable reductions in the long position over the past few weeks as traders abandoned these longs for a few reasons. One being lack of a weather premium being built-in South America and secondly for the soy complex , a lack of consistent demand from China. Without these bullish tenets in the market, it was easy for funds to sell into the soy complex just like they have done with vigor in both the wheat and corn markets. Argentina still has crops to get in the ground while Brazil planted late this year. There is some noise in the market that due to late plantings of beans in Brazil and the current low price of corn that Brazil’s secondary corn crop will have less plantings. To me that’s noise in the market. In front of us is the January crop report and beyond that key yield development time in February and then March for both beans and corn in the Southern Hemisphere. With the trade short 200 K in Corn and around 150 K in wheat as of last week, I believe trading opportunities abound into early next year.

Chicago Wheat vs Corn (March 2018)

Wheat continues to gain on corn and this spread continues to show some signs of life. The spread traded down to a monthly low of 61 wheat over corn on December 10th. From there the market  rallied to 77 over gaining approximately 16 cents. It then gave back half the rally to 69 over and finished the week and 2017 at 77 over. Look to buy a dip in this spread at 72 over with a stop under 68. Upside targets are for this spread in my view are for the spread to trade up to 83 and then possibly 95 cents wheat over corn.

Chicago vs Minneapolis Wheat (March 2018)

I have been advocating selling this spread at 1.95 to 197 Minn over Chicago as I look for both KC and Chicago wheat to gain on Minneapolis as I see both spreads tightening. This spread traded up to 195.4 Minn over Chicago this week before finishing the week at 187.4 over. With sizable shorts in both the Chicago and KC outright contracts, look to sell this spread at 1.95 over with a downside initial target at 1.60 over. Beyond that this spread could push to 1.45 over. I think heading into the January crop report that the trade will fear less winter wheat plantings. This coupled with  a weather premium being built-in the very near term due to drought in the western wheat belt, should increase talk of smaller crop sizes on top of  fear of lower winter wheat sowings. Funds usually trade fear before fact and the result as I see it will be to look for both KC and Chicago wheat to gain on Minneapolis into January. Minneapolis vs KC is currently trading at 1.86, Minn over KC.

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Happy and Prosperous 2018 to all!!

 

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