Grain Spreads: Inversions Dominate

Sean LuskGeneral Commentary

Commentary 

As of January 24th, the CFTC on their latest announcement had funds long an estimated 135k soymeal contracts. The net long was down 5K on the week, but given the Friday/Monday rally, that fund long maybe close to 150K. Crop and weather scouts down in Argentina, see dryness concerns rebuilding in late February at the latest, even earlier if showers forecasted in the 11–15-day time frame do not verify. The fund length in meal maybe telling us that all the sizable traders are on one side of the boat. In my opinion, it is why March beans have rallied approximately 60 cents from last week’s lows, while March soymeal rallied from 454 to 490 in just 4 sessions. Brazil though is looking at harvesting a monster bean crop. However, rains there have put harvest at just 5 percent complete, which is about 10 points behind the average of pace. Can anyone say short squeeze on the March bean and meal contract? Should the rally continue, I wouldn’t worry about shorting the front month March contract and picking a top, that right now is like blindly throwing a dart at the Board. I think one should be more focused on deferred old crop contracts as they try to keep pace with the front month rally. March 23/May 23 beans and May23 /July23 beans, along with March 23/May 23 meal and May 23/July 23 meal are heavily inverted. The market is telling us something here in my view, and that scarcity remains amid a prolonged Argentinean drought. The result being inverted bean, meal, and corn spreads.  I have a lot of option ideas in the deferred old crop contracts along with the July 23/Nov 23 bean spread futures spread, shown below. Provided of course that you think of seeing plus 15.00 beans is a trading opportunity amid a record Brazilian harvest in the weeks ahead. The flipside here aside from weather is demand. Demand drives price in my opinion. It has exceeded expectations for beans and has aided this rally too. One reason why the USDA lowered ending stocks to 210 million bushels in the January report as they had to account for increased demand given strong sales for future shipment. Should China cancel shipments in the weeks ahead opting for cheaper S.A origins, look out for some larger protracted moves lower in my view. The spreads maybe our biggest clue as to if/when the bean market turns over in my opinion.

Trade Ideas

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Sean Lusk

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