Grain Spreads

Sean LuskGeneral Commentary

As funds pushed both corn, beans, and KC wheat higher for better part of the first quarter and from the early April tariff lows, it seems to me that some profit taking has set in. Managed money came into the week prior long corn, beans, and meal. Nothing new here as they have been long the market for weeks. KC wheat funds pushed out to a 34 K long. With May options off the board today and July moving top step on the Board some rolling took place along with fund liquidation this week. All three markets will look for new catalysts to push the market higher or we could see further fund liquidation. Normally funds will clean their books ahead of US planting and growing season and drive the market lower only to re buy at the lows amid growing season uncertainty. This year its been different due to weather events in North and South America due to drought that kept funds buying dips even though demand was spotty. This was true for wheat, beans, and soy meal.

Corn demand especially from China has surpassed expectations. Export Sales for future shipment coupled with lower crop sizes out of South America has given thoughts to lower ending stocks later in 2018 to the tune of 1.6 billion metric tons vs 2.1 billion currently. We shall see. Will this projection be priced now or later? Most likely the latter although we have seen new crop option calls gain favor in the last month. Which makes me somewhat suspect. Corn broke 10 cents this week as funds sold as they did in KC wheat and beans. Look to buy Corn at 3.82 basis July if looking to play futures. If it fails to hold we could break to the low 370’s. Option players can look to buy the 390 call and sell 2 360 puts for a few cents should 382 hold into next week.

If looking for a inter-market  spread, consider the following. I still like corn vs KC wheat under the following condition. If July KC can’t rally above 5.07 and settle over it, look for corn to tighten vs KC. Buy corn vs  selling July KC wheat at 1.16 -1.18 KC over with a tight stop of 7-8 cents upon entry. Trend line support sits at approximately 93 cents KC over which is where you cover your short in my view. Call or email with questions. 1 to 5  and 6 to 10 day forecasts in the winter wheat belt will be the determinant here as further dryness in the western wheat belt could lead KC higher.

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