Grain Spreads: Evening Up

Sean Lusk General Commentary Leave a Comment

The soy complex led the way higher for grains this week. November Beans finished 22 cents higher while Soy Oil gained $1.20 to just shy of the 30.00 threshold and a potential breakout on the charts. December soy meal gained a scant 4 handles to finish at 303.7. Funds have been slowly building a burgeoning short in the soy market, amassing 120 K shorts into this week. However short covering has been the theme for this week at least, as the looming crop report which will have both acres and yield, production, and demand estimates both domestically and globally is out Monday at 11am. Funds evened up on some positions heading into the report. Bean acres look to come in around 80.5 million acres, the average trade guess with average yield guesses at 47.4, BPA. Average trade guess comes in at 815 million bushels for ending stocks. I think if we come in at or near the trade guesses we chop after the report. The focus then turns to weather the next two weeks as that will determine final yield until we get to first frost/freeze dates. Of course a wild corn/wheat break or rally will affect soy prices. If weather turns hot and dry for the second half of August, or at the very least too dry in the Eastern grain belt, this market will test 920 quickly and then 940 in my view. With pod setting at only 37 percent ( way late for second week of August) and good to excellent conditions for beans at only 54 percent as of this past Monday, the next two to three condition reports released every Monday at 3 pm may be the reports to watch out for on Monday if acres/ending stocks come in near expectations. Make no mistake, for now any continued rally in soy will be supply side driven through August.

Corn-It’s all about the acres # at 11am. The average trade guess is 87.7 million acres planted vs 91.7 , the month prior. Yield guesses are right around 166.4 although I have seen some at 164.9 depending on the publication. I have seen acres all the way down to 80-81 million planted, and seen some at unchanged at 91. It’s the USDA roulette wheel for now for planted and harvested acres and prevent plant acres. Average trade guess for ending stocks is at 1.5 billion bushels. No matter the number the market I think will accept it as legit until we get adjustments in subsequent reports, in the months to come. I would simply bet both ways if playing the report. If betting higher, one could buy the Oct 430/450 call spread for 5 cents. Downside, buy the Week 3 410 puts for 6 cents. You are betting volatility on report day into Tuesday’s trade. Hedgers can consider the following. Have orders working to buy the March 2020 400 puts for 12 cents. At the same time sell two of the 550 calls for 6 cents apiece. Spread cost is even money plus commissions and fees. If looking to Texas hedge long term, or spec buy on a potential tightening situation in corn longer term, buy the September 2020 5.00/6.00 call spread for 8 cents. cost is $400 plus commissions and fees. Like beans, drought like conditions in the eastern belt where conditions are marginal at best, deeper into August, will have the markets focus quickly, where the report is a foregone conclusion in my view.

Wheat-I keep hearing no demand and too much supply. Its having an effect on the KC and Minneapolis wheat contracts. Stubbornly the soft red Chicago wheat contract sits at or near 5.00 which is somewhat elevated given weak demand. However as cool and wet weather plagued corn and bean plantings, it really hurt soft red wheat ratings and condition. While at the same time conditions for hard red or KC wheat rose on very good condition and production while Minneapolis followed. The result here in the US is an abundance of higher protein wheat in the bin and more coming with Spring wheat about to be harvested, while the Chicago contract potentially gets smaller. Funds have therefore pounded the KC contract and to a smaller extent, went record short Minneapolis wheat futures vs Chicago. This I think will unwind at some point as planting in the South and those uncertainties take hold deep into September and into October for hard red wheat or the KC contract. Chicago wheat over KC basis September traded 85.4 cents KC under today settling at 82.4 under. This I’m told is a record or at the very least a level that hasn’t been seen in over 20 years.

The best thing to do into Mondays reports is to leave your opinions at the door and let the charts be your guide/ road map for your entries and exits. Weather and its impact on future yields can and always will be the ultimate determinate for price is my belief. We are here to help and can send you our charts and offer trade ideas for speculation and hedge. Every Thursday I hold a weekly webinar at 3 pm on the grain and livestock sector. We discuss supply, demand, weather, and the Charts. Signup is free and a recording link will be sent to your email. Sign Up Now

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