Grain Spreads: Back to Reality

Sean Lusk General Commentary Leave a Comment

Today’s quarter end grain stocks report gave traders a fresh reminder of just the massive supply of crops that the US has in the bin amid harvest in the Midwest. After trading higher in the last week, corn and beans did an about face and traded appreciably lower to end the month and quarter. The US September 1st corn stocks estimate of 2,140 Mil Bu was 138 Mil Bu above the average trade estimate and in my view bearish. The Q4 US corn feed/ residual use rate is calculated at just 595 Mil Bu, down 92 Mil Bu from last year, and 103 Mil Bu above the 5-year average. The heavy movement of corn off the farm during the late summer most likely produced the reduced feed/residual use.   Corn in the hands of commercials is often more accurately counted. Adding the additional old crop US corn old crop stocks would raise 2018/19 US corn stocks near 1,900 Mil Bu assuming no change in yield or demand within the Oct WASDE.  The 2017 US soybean crop was raised 19.1 Mil Bu to 4,411 which pegged 2017/18 US soybean end stocks of 438 Mil Bu. Such stocks are up 43 Mil Bu from the September WASDE and will elevate 2018/19 soybean end stocks to 883 Mil Bu assuming no change in WASDE demand and or yield.  The September Stocks report added to the new crop supply of corn/soy. The report is seen as bearish and CBOT futures are lower at midday. The wheat report was neutral and rising world prices could offer support.

Where to from here?

The next big gov’t report is Oct 11th. there is going to be increased talk of a big cvrop getting bigger unless something enters into the market that is friendly for demand. Lets examine KC or Chicago wheat vs corn. Both wheat contracts finished over 1.50 over corn and if we hold support vs corn, I believe this spread is a buy. Dec Kc wheat needs to hold above 5.07. Dec Chicago over 5.08. Given the fear that ending stocks may grow for corn increasing stocks/usage in subsequent gov’t reports, I look for this spread to widen to 1.75/1.80 wheat over.

Soy complex-Despite the bearish bean data, old crop/new crop meal and bean spreads barely budged. Dec18/Dec19 meal actually rallied 1.6 today to settle just 0.3 below parity. March 19 vs Dec 19 meal settled at 0.7 March 18 under but rallied almost 1 handle today. There is major trend line support in Dec 18  meal coming next week at 3.04. Major support for Nov 18 soybeans comes next week at 8.38. Watch these levels Sunday night into Monday. If support next week is able to hold, the market wont break in my view until we get data from the USDA on October 11th. Prior to today’s numbers, there have been reasons to buy beans and meal. We have the cheapest soy products in the world and even with the 25% tariff, we sit at or below FOB Brazilian offers. There also have been sizable soybeans/soymeal sales into Argentina, Mexico, and Canada for future shipment. Raising the bean carryout from 840 to 883 means little to the trade at this point outside of report day. (the crop is historically a record, what’s another 43 million at this point!) However as we get closer to Oct 11th, you will here more noise about avg trade guesses above 900 million bushels with somebody undoubtedly predicting for 1 billion. Watch the support levels, if they can’t hold we potentially move to 812 in Nov beans and 294 in Dec meal.

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