Grain Spreads: Fund Dilemma

Sean Lusk General Commentary Leave a Comment

In my opinion funds have enjoyed a prosperous 2019 so far building and amassing shorts on rallies especially in corn and and wheat. In my estimation managed money shorts in corn pushed out to 220 K, and in all wheat classes 130 K. They are short beans and meal, but to a lesser percentage. It is interesting that you have record ending stocks but not a more sizable short in the market. Soy has over performed so far. The massive short in corn is surprising as these funds are discounting any trade deal that can alter the balance sheet weather stress in the great plains and northern corn belt where flooding persists in many areas. Perhaps a bigger corn crop in South America this growing season has given thoughts of increased competition from major world buyers in future tenders later this Spring and beyond. Under 3.60 in corn and its 3.48. Over 3.88/89, and its 401. We may see some volatility into month end planting intentions and if a trade deal is finalized. Advice is to bet both ways. Use June option strangles into the month end report and the April WASDE. Buy the June 4.00 call and 370 put for 10 cents. Stop loss at 5. Objective 40 cents. Weekly corn below:

The market’s confidence in a US/China trade deal is rising as the market starts to add premium for an announcement of a signing summit in my view. The potential spending by China of $50 Billion for US Ag goods is massive and alters prevailing long-term Ag trends in my opinion.   CME hog futures reached limit up levels at the CME amid China demand rumors today. The Chinese demand for US pork has grain traders optimistic that a deal can be struck. Still one must be suspect in my view and proceed with caution. Weather and demand will drive price in grains.I see funds using a rinse and repeat, selling any rallies into month end and beyond or they cover and maybe build a long position. Again take positions on both sides. Small bets. Given the fund reluctance to not want to break soy, take a look at the Nov19/Nov 20 futures spread. (see chart). It has found support at 36 to 38 cents Nov 19 under four times since October 2018. Today it settled at 32 under. Once could buy this spread with a stop under 38 cents, with a near term objective of 21. Combo that buying a near term put, say the May 890 for 7 cents.


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