Grain Spreads: Corn Realities…

Sean LuskGeneral Commentary, Grains

Spot Corn futures settled at their best level in weeks and looks poised for a potential run to 4.05 basis March futures and maybe beyond. Weather and its impact on future yields in South America will be one of the major determinants for price. The demand side of the ledger will depend on sales for future shipment to increase in the weeks ahead. Despite the USDA’s willingness to do whatever they can to increase domestic supply amid usage cuts and yield increases (Jan 10th Crop Report), the trade is well aware that revisions to these guesstimates will be made on future reports. The March 31st on farm stocks report may reveal what we don’t have. Remember there’s close to a billion bushels left out in fields this year unharvested in the US, an unprecedented amount that could be damaged. However we just haven’t seen from the demand side of the ledger for funds to short cover and buy corn. It’s been hearsay given all the trade talk and well-wishing for future AG purchases from China and NAFTA 2.0

Having said all of that the current demand side of the ledger may look somewhat better in the months to come. South American corn production as is stands right now has question marks. The secondary corn crop in Brazil which accounts for close to 70 percent of their total harvest isn’t grown until after their soybean harvest. The bean harvest has been delayed in many growing areas due to late plantings in November and now late harvests due to too much rain. Should it continue the optimal time for getting their secondary corn crop in the ground gets delayed bringing about more questions than answers. Because Brazil has sold so much more corn vs years past and gained market share vs the US for meaningful export business, their ending stocks have dwindled to the point that their largest commercial end user JBS is buying corn from Argentina. Last week they purchased 700K metric tons and second sizable purchase in the last 45 days. While too wet in Brazil many growing areas in Argentina have been without moisture in the Central and Southern growing areas. This needs to be watched. Given low production in the US this past growing season, there could be a supply squeeze down the road if South American production falls below estimates. Weather in SA, a tightening domestic basis, and USDA revisions that come to grips with reality would for me more viable for a Corn rally than relying on China to adhere to promises made in a Phase One Deal to be bullish from a demand standpoint.  

Futures Trade-One way to take advantage of a corn rally is to look at a old crop/new crop spread. July20/Dec 20 corn. Buy the July and sell the Dec. It settled at parity or unchanged. It has support at 5.4 cents July under and reflects a potential double bottom on the charts. It loos like it could break out on the charts here and possibly move to 9 to 10 cents over. A larger rally would take it to 20 to 21 over which is a fifty percent retracement of last summers high to last falls low. I would be out on a close below 6 cents July under. For producers, this affords them the potential to lock in above 4.00 on new crop leaving them the option of trading July as a speculative position or a bullish hedge for any cash sales made.

Options Trade-To position into Corn. Consider the following. Sell the July 20 corn 450/400 puts spread for a 37 cent collection. Buy the July 430 call for 10 and buy the May 380 put for 5 cents. Total collection is 22 cents minus commissions and fees. The May put allows for protection in case of a sizable break while the July option strategy is an aggressive bullish strategy. Risk here is 28 cents plus all commissions and fees.

Corn chart

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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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