Grain Spreads: Haves and Have-Nots

Sean LuskGeneral Commentary

Commentary

Declining crop ratings in Minnesota, Iowa, and the Dakotas weren’t enough to hold overnight rallies in corn and beans as corn finished a half penny lower on the day, but 14 cents off the high. November soybeans finished up 1.6 cents on day at 1359.4 but fell 28 cents from the intra-day high. Recent rains haven’t been the savior so far in drought stricken areas in these states, whereas conditions East of the Mississippi River are seen as excellent. The market in my view is struggling to determine if yields in the East will outperform and make up any production shortages in the aforementioned drought stricken NW quadrant of the grain belt. The next 14 days are seen as dire in these areas. For beans, Iowa dropped 5 points in the good to excellent category from 66 to 61. Minnesota dropped 7 points from 43 to 36. South Dakota dropped three from 29 to 26, while North Dakota dropped 3 points from 20 to 17 points. Rains in these areas are needed as we enter into August. Currently forecasts are calling for extreme heat to turn into a  cooler trend emerging in the corn belt for the 6-10 day time frame according to European and Canadian models. However they are now noting that the continued aggressive cold push is forcing out much-needed rains to the South leaving the Plains and NW quadrant in much the same precipitation pattern that it has been for the bulk of the growing season. Cool temps in my view would most likely aid stressed crops in the dry northwest in August but a continued lack of moisture would increase those areas that are already struggling, badly in need of a good shot of rain soon. Keep in mind these forecasts can flip in a moments notice and confidence in anything longer than the 6 to 10 day is a fools errand in my view. The Sunday night re-opening trade the next two to three weeks may bring  increased volatility with probable gap openings  higher/lower based on flips in weather. Given the 155 million bushel carry and stocks to usage tying a record all time low, a continued threat of drought in the NW quadrant could mean the path of least resistance is higher for beans. Lots of “ifs” and “maybe’s” here on what could happen. Please consider during US growing season we are supply side dominated as far as pricing is concerned. We don’t have another crop report from USDA until August 12th, but private crop tours begin next week. Weather though will be 90 percent of our pricing influence up until that report in my opinion. Last Friday, I suggested a downside move in October options. Today I will suggest an upside play using two different months. Call or email me with questions. 

Trade Ideas

Futures-N/A

Options-Buy 1 of the October 21 soybean 15.00 calls and sell 1 of the November 21 soybean 16.00 calls. Bid -4.4 cents on the strategy. 

Risk/Reward

Futures-N/A

Options-The initial risk is 4.4 cents ($225.00) plus commissions and fees. However, should November futures settle below 15.00 by September 24th, the long October 15.00 call would expire worth less while one would be short the November 16.00 call in a naked short call position. Therefore, I’m looking to be out of this spread and both sides by Labor Day weekend in early September. I would also put a stop loss at -12.4 cents on this strategy, risking approximately 8 cents or $400.00 plus trade costs and fees. If rains don’t show up in areas of need, I see November beans  trading up to 14.32 and then 15.10 quickly in my opinion.  

Please join me for a free grain and livestock webinar every Thursday at 3 pm Central. We discuss supply, demand, weather and the charts. Sign Up  Now

Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.​

Futures and options trading involves substantial risk and is not suitable for all investors. Therefore, individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option will result in a futures position. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. The information contained on this site is the opinion of the writer or was obtained from sources cited within the commentary. The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.​

All information, communications, publications, and reports, including this specific material, used and distributed by Walsh Trading, Inc. (“WTI”) shall not be construed as a solicitation for entering into a derivatives transaction. WTI does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71.