Grain Spreads: Active Buying Ensues

Sean LuskGeneral Commentary

Beans ignited 15 cents on the open this morning forging a top at 858 basis November while Dec Meal rallied to 316. However as with previous rallies in beans and meal, selling emerged on the rally and beans finished the day at 845 while meal fell below weekly resistance at 310.3 to settle at 309. The rally this morning came on two fronts in my view:

Argentina’s largest union plans to cease work for the next 24 hours in protest of President Macri’s handling of the economy and amid runaway inflation. Compensation to offset inflation is demanded per news reports. The strike has affected operations at the port of Rosario, and the strike’s duration is key. It’s unlikely to me that this will affect soy complex trade flows longer term, but the recent demand for US soybeans from Argentina has kept Nov beans bid above major support at 840 and above the monthly lows at 812.

Argentina’s Central Bank head has also resigned this AM, and in my view won’t help investor confidence. The Argentine peso was down 3% today at one point today, and the forward curve may suggest Argentine farmers are better off holding beans, at least into the end of 2018. With the month almost over, some estimates I have seen have Chinese soybean imports from all origins in September at 6.8 million metric tons.  At this point a year ago in Sep, Chinese imports of beans were estimated at 6.4 million metric tons so there does not yet seem to be any major shift in China’s total appetite just yet. Recall the Chinese government recently pegged new crop Chinese soybean imports at 83 million metric tons down roughly 10 on the year. Bottom line its early in the new crop season but in my view they still need the beans despite their previous bearish projections.

Corn has higher lows coming up the page and has traded higher for 5 sessions in a row. Today’s close above 362, could push corn to 369 and potentially 376. Funds pushed out to a 141 K short as of last Tuesday according to COT data and I would suspect some got caught down there. Harvest progress has been slow so far at 16 percent complete. Fridays average trade guess has corn at 2.01 billion bushels, compared to 2.293 billion bushels last years on farm total. Weekly inspections and future sales have been good for corn from a demand perspective near term. This has prompted some short covering. Just this morning Mexico bought another 239 K metric tonnes of corn per the USDA for 18/19 shipment. Being it month and quarter end are also reasons for short covering. The aforementioned Argentina story is one to keep an eye on for beans , should they stage a rally up to the 9 handle they will pull corn along for the ride. Wheat succumbed to some profit taking vs corn this week. These spreads have traded from recent highs up at 1.85 (KC wheat over corn) and 178 over (Chicago wheat over corn) to 158, and 157 respectively as of today’s close. I look for these spreads to tighten further despite weather worries globally for wheat. Fridays grain stocks report could result in wheat being sold into further if the USDA raises on farm stocks amid not raising exports. Unlike corn, wheat demand has disappointed in my view with inspections and future sales below expectations. Supply side weather issues need to re-emerge to engage funds who have liquidated sizable long positions back into the long side of the market.

Trades to consider:

Beans-bearish, Buy the Dec 820 put, Sell 2 780 puts. Cost to entry 2.4 cents plus commissions and fees. Risk at option expiration under 740 basis Jan futures. If we revisit the near term lows at 812 , the price on the 820 Dec option premium could be at 25 cents OB in my view. If new lows are made to the 7 handle, I would simply take off the put spread and roll the extra put down. Call me for strategy.

Beans-bullish, Buy the March 19 920 put for 19 cents. Sell the March 1000 call for 8 cents. Sell the March 1040 for 5.4 cents. Cost to entry is 5.4 cents plus commissions and fees. Halfway back on  the beans from yearly high/low sits near 940. If we rally , I feel this attainable from a technical standpoint. If we rally further than 940, its likely due to weather and trade. Risk is above 1120 at option expiration.

I would play outright futures for corn unless you need hedge protection.

Hedge play corn: Buy the March 19 370 put for 12.4. Sell 2 410 calls for 6.2 apiece. Cost to entry is even money plus commissions and fees.

Hedge play KC wheat: Buy the March 19 5.00 put for 9 cents. Sell 2 March 7.00 calls for 4.4 cents. Cost to entry is even money plus commissions and fees.

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