Grain Spreads: Corn Thoughts

Sean Lusk General Commentary Leave a Comment

I believe we will start hearing further noise in the market about increased plantings of corn at the expense of beans for the 2019/20 crop season. While some rumors on this are slowly creeping into the market, the reasons are not without merit in my view. Whether it becomes reality is another matter as trade disputes getting resolved along with weather could be the biggest determinant for corn prices. In the last week July19/Dec 19 corn has tightened from a 10 cent carry to a 4 cent carry as old crop futures tighten against new crop. With corn harvest about 98 percent complete, the market transitions from harvest pressures domestically to the corn growing areas of the Southern Hemisphere and of course demand. We are a long way off from knowing what South America will produce for corn this growing season, US production could continue to slightly wane given late season weather issues giving thoughts to a lower production and ending stocks. If the USDA in the next two reports shows a declining 18/19 US corn crop vs expectations, we could see “old crop”contracts continue to slowly gain on “new crop” Dec 19 contracts. The spread here could trade from a carry to an inversion as thoughts of increased plantings would pressure new crop contracts vs old. In my view it is at least plausible. For producers worried about new crop pricing can look no further than the following trades

Futures Spread:Buy the July 19/Dec 19 corn spread at a 7 cent carry.

Options-Buy the July 19 4.00 put for 20 cents. For every put sell the 2 of the 440 July calls for 8.4 cents collecting 17 cents. Spread cost is 3 cents plus commissions and fees.

For those with old crop corn to price, the option ratio here makes sense as you are buying in the money puts at 4.00 hedged. The futures spread while speculative initially allows one to price in Dec 19 contracts at 4.02-4.05 for a percentage hedge as you are buying July 19 and selling Dec 19. This also in my view ensures your hedges don’t get run over if a sizable rally ensues. However one can always peel off the July 19 futures long should we not rally going forward.

I have plenty of ideas across the grain board here for speculation and hedge. Call me or my team for a free prospectus for your market. 888 391 7894 or email me slusk@walshtrading.com

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