Grain Spreads: Long Term Corn

Sean Lusk General Commentary Leave a Comment

In my view you probably won’t see major slippage in next years planted corn crop until they know what it is or isn’t. That won’t be until next summer following planting and early growing season.Near term the USDA seems to be bent on discounting the damage in the Midwest in the Spring /early Summer to protect the end user namely the ethanol industry. My opinion here. In my view trend and index following funds are now married to the planted acres number given on Aug 12th at 90 million. The USDA citing all the late planted corn in mid to late June/early July. They are 5 million to high most likely (according to the FSA, Farm Services Agency) that released their own estimates on August 12th. For me harvested acres is the real number that matters, and could likely come in between 76 to 80 million corn acres harvested. Currently the USDA is at 82 million harvested with a 169.5 yield. There’s a lot of variables going forward with final yields and production determined by weather and is very subjective in my opinion.

Using a harvested acres at 78 million harvested vs a yield at 168 gives us a production number at 13.1 billion bushels vs the USDA at 13.9. This could knock ending stocks down to 1.2 billion from just over 2.1 billion. A tighter outlook and a possible decreasing stocks to usage percentage. Of course this might not be a known until January or March 2020.

In my opinion why would you ever take the loss in options trading when you can simply use rolls? In this case sell next years put spreads that are 1.00 wide.The trade I’m suggesting would be to utilize this recent break to sell the 5.00 Dec 2020 put and buy the Dec 2020 4.00 put as a spread for a collection of 80 cents. It settled at 76.3 today. The max this can go against you is 1.00, so the risk is 20 cents for the next 14 months as I see it. So you are collecting at an 80 percent threshold. With the collection one can either protect the remaining 20 percent or Texas hedge. Once could and maybe buy the 4.00/450 call spread in July for bid of 8 to 10 cents plus commissions and fees, looking for a potential Spring rally one could look to sell the call spread for a 30 cent profit while buying back the put spread in Dec 20 back at 40 cents to close everything out.

The point is to amass as much as you collect initially and to “sell high and buy low”. Should the market not rally in the next 6 to 9 months , simply roll the spreads at or slightly below break-even by selling a Dec 21 corn option spread. Hypothetically, let’s say I have 10 K in an acct. I can sell 5 of these spreads at 80 cents collecting 4 K a spread for a total of 20 K. My acct balance is now almost 30 K minus commissions and fees by selling 5 spreads but my liquidation value is slightly under 10 K . To reduce worry about a late exercise on the options I would use a stop loss of 94 cents on this spread for starters risking approximately 700 a spread plus commissions and fees. It’s a big collection and its for a static long in the market for the long term and allows me to finance trades in the near term like a strangle in corn by buying puts/calls near term if need be. Need to watch margin here. As with everything else, timing is key, but the goal is to establish a static long that differs from just buying futures on a pullback or at a potential bottom. Currently we are just above key support for corn at 366/367 Dec 19. Need to hold here or we could fall to 357 and then 346 in my opinion. Call me with any questions at 888 391 7894 or slusk@walshtrading.com

Each Thursday I hold a weekly grain and livestock webinar at 3 pm Central. We discuss supply, demand, weather, charts, and of course potential trading ideas. Sign-up is free and a recording link will be sent your email. Sign Up Now

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