Grain Spreads

Sean LuskGeneral Commentary, Grains

Commentary: The demand destruction across various sectors is unfortunately very real as the economy shuts down. Retail Sales which account for over 70 percent of GDP has been sidelined or idled except for some trips to the grocery store by consumers. The destruction in energy and those effects have spilled into most sectors, one commodity that we follow is corn, has seen future demand eroded on thoughts of less bushels being needed to grind into ethanol. Around one-third of corns production goes into ethanol. Nobody driving equals less domestic demand for ethanol. That means a greater supply of corn is available as more ethanol plants shut down. I attached a monthly chart. The spot may contract hit 3.01 for a weekly low this week before bouncing to end the week to finish at 3.15. The front month is now July 20 corn trading at 323. If one looks at the chart, one can see that 3.00 has been a near term low going back to 2008/09. We’ve seen sizable rallies from there. For July corn which is the most actively traded contract, made a weekly low at 3.09, below our 20 percent threshold target at 3.11, and has since found some profit taking the last few sessions. Has some of the demand destruction been priced in? Or do prices fall out of bed to lower levels with a 2 handle in front of corn prior to any sizable short covering by emerging by funds? Trend and Index Funds sit short as of Tuesday 4/21/20, a total of 160K contracts. Last year in late April and early May, it was estimated these funds were short over 330K contracts. Surprising to me given the market fundamentals weren’t nearly as bearish as they could potentially be this year. Will funds wait for firmer prices to add to their shorts? Its possible. Its also possible that many of them are sitting on the sidelines as well, awaiting a clearer picture on the virus before putting their money back on the table. If it is the latter look for prices to firm. Potential weather events amid renewed demand by China as they acquire more bin space to access more commodities would be two reasons for a push higher. I’m citing a Reuters story among other outlets reporting the bin space story from a few days ago and specific tonnages of Chinese buying. Regardless of that I’m near term friendly prices given the seasonal uncertainties of plantings and growing season. Look at when prices performed best for Corn during the course of a calendar year. I also see the Country going back to work in some shape or form beginning in June. We maybe having a much different conversation by then regarding prices or maybe a more upbeat attitude regarding economic conditions.

Trade Suggestion(s):

Futures Trade: N/A

Options Trade: looking for a possible rally. Sell the September 20 Corn 4.00/3.40 put spread at 50 cents OB.

Risk/Reward:

Futures: N/A

Options: One is taking a collection upon entry here. If filled at 50 cents, one is collecting $2500.00 on the spread minus commissions and fees. The risk if corn goes lower at option expiration and settles below 3.40 in late August, would result in a 60-cent debit. The risk is therefore 10 cents plus trade costs and fees. The goal is to Sell high and Buy low.

Call me with questions. There are many ways to play the upside with defined risk and lower spread margins. Every Thursday I hold a weekly grain and livestock webinar at 3pm Central. We discuss supply, demand, weather, and the charts. Signup is free and a recording link will be sent to your email. Sign Up Now

Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
312 957 8103
888 391 7894 toll free
312 256 0109 fax
slusk@walshtrading.com
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