Grain Spreads

Sean LuskGeneral Commentary

Commentary

The recent rally in grains is still intact despite todays small pullback in beans and corn. Last week’s Derecho event resulted in over 150 counties in Iowa being declared a disaster area. Crop losses along with storage and facility damage are still being debated as far as the monetary costs and loss of production. This event to me is another black swan entering into the market in 2020. The Derecho coupled with dry weather in the Midwest forecasted until month end has crop scouts lowering yield forecasts and production in the driest pockets of the Midwest. Then there is China. They bought 325K metric tons for 20/21 delivery this morning which follows prior July 2020 purchases that were record large. Rumors abound that their Temporary Reserve, from which their weekly auctions have been taking place, has just 9 million metric tons (354 million bushels) left in it, which is consistent with what analysts say is remaining. That would mean that the Temporary Reserve corn would be all but gone after next week’s auction, shifting the source to the National Reserve, which is believed to have 10 million metric tons in it. That would buy another 2 to 3 weeks of supply, before China would have to tap into its Permanent Reserve, which we do not think that they would be willing to do. It’s choice then would be to ramp up imports significantly to rotate out with the Permanent Reserve stocks, or to let the market develop freely to ration demand to fit existing supplies.

Inflation concerns that could bring about a broad-based commodity rally or at the very least a food inflation push higher are becoming more real in the face of a weaker Dollar in my opinion. The number of unknowns in the market are becoming more numerous than just from a few weeks ago. Did anybody see a Derecho emerging potentially wiping out millions of acres of corn in Iowa? Did anyone see a peace deal between the Israeli’s and Arab nations like the UAE that has resulted in helping Trump narrow the gap in the polls between Biden, in a major foreign policy coup? In my view its only the beginning. I see this year getting crazier or unexpected as we move toward to the election and into 2021. The Fed has stated they aren’t moving the needle with rates until 2022. While they can alter their purview of the economy, they are trying to stoke inflation. Gold and Silver have been the biggest benefactors of their policies so far in my view with equities as a close second. We have crop issues in the World’s two largest economies now, will higher prices follow? I’m betting on an inflation inspired rally into 2021. Cheap bets with relatively low risk and good reward that bets prices possibly could move back to pre-covid levels. If one studies the price action in commodity sectors from the last recession in 2008/2009, we saw prices bottom in late 08 or early 09 then stage fund driven rallies against a weaker greenback in 2010 and 2011. Prices are cyclical and I potentially see that type of setup again. Trades below are just one way to play, not THE way. Call me with questions/comments.

Trade Idea-

Futures-N/A

Options-

May 21 Corn. Buy the 4.00 call and sell the 4.50/4.00 put spread for negative 40 cents.

May 21 Soybeans. Buy the 10.00 call and sell the 11.00/10.00 put spread.

Risk/Reward-

Futures-N/A

Options-Both strategies take in collections on the way in and if both underlying futures see broad based rallies of 1.00 to 1.20 on the futures board, could collect on the way out. For corn one collects 40 cents or 2K minus commissions and fees. A sell stop should be initiated at negative 48 cents. The risk is approximately $400.00 plus trade costs and fees. A move to 4.25 is needed to keep the collection and possibly collect on the exit given then timing. May 20 settled today at 3.61. For May 21 Soybeans the risk is greater as is the collection. One collects 80 cents or 4K upon entry minus commissions and fees. We need a move to 10.50 to collect all of it and like corn, given the timing would possibly collect on the way out. Call or email me with questions

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