Grain Spreads: Inflation Plays Corn and Hogs

Sean Lusk General Commentary Leave a Comment

Commentary

Big report coming tomorrow for Corn and then another one on October 9th regarding supply and demand. Yield estimates are all over the place. Some say Derecho damage in Iowa not as bad as feared. In other areas the corn looks bumper with areas in Minnesota, Southern Illinois and Indiana. Its never the same everywhere and this year its the case. Will Chinese demand pick up to affect ending stocks? Tomorrow’s on farm quarterly stocks report could reveal surprises. Last year the report showed 300 million bushels less than what the market had been thinking, a bullish surprise. This year guesstimates are coming at 2.250 billion bushels. The range is wide though. (2.12bb-2.574bb), a 400 million bushel range. It could get wild tomorrow. I think the reason to have a static long in corn would be the developing potential LaNina. That means hot and dry for Central/Southern Brazil and North/Central Argentina during planting and growing season potentially. A weather market plus inflationary pressures will bring funds to the long side in my view as a delay in bean plantings could mean less corn eventually produced in Brazil. Trade idea and chart below.

Monthly Corn

Hog report last week raised more questions than answers and for me a long term value play could be sought after. In my view contrary to the USDA numbers, that the sow herd did not expand last quarter. In my view the pig crop was down and farrowing projections down. The lean hog price is stronger currently than anytime in 2020. No one pays more than they have too and I would include packers in that category. Hogs $40 a head higher than a year ago.There are no backed up hogs in my opinion with weights slightly lower than a year ago. Lots of finishing barns empty looking for feeders. Also of note, U.S. Pork Cut-out 90¢ lb. plus, Germany cut off from Asia due to ASF, could pull more North American pork to Asia. Last week during a virtual conference in Spain it was reported further exports to China from Spain will be limited due to already full freezer space. If ASF expands deeper into Europe moving east to west, look out for a rally in my view.

Trade Idea Corn

Futures-n/a

Options-Buy the March 21 corn 410 call. Sell the 450/400 put spread. Collect 39 cents upon entry

Trade Idea Hogs

Futures-N/A

Options-Buy the April 90 call and sell the April 21 100/90 put spread. Bid -900 upon entry.

Risk/Reward

Corn-Buy the spread at -39 cents. Max risk is 50 cents on this three way but you are collecting 39 cents on the way in so the risk is 11 cents plus trade costs and fees. A weather rally takes us to 4.26 then 4.54 in my opinion.

Hogs-One is collecting 900 points or $3600 minus commissions and fees upon entry. The max risk is 4K plus trade costs and fees, however one is collecting 3600 on the way in, so the risk is $400.00 plus trade costs and fees.

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