Grain Spreads: Politicians Enter the Supply Side

Sean LuskGeneral Commentary

There is lots of noise, rumor and talk of subsidy and or trade mitigation for US farmers going forward as a financial aid program for farmers hurt by the trade war. The aid is set to be announced at some point Friday and is potentially said to be in excess of $15 billion. Payments of $2.00 to soybean growers, 63 cents per bushel for wheat growers, and 4 cents per bushel for corn growers. The soy market seems to be taking the USDA at its word in that it won’t be offering a Trade Assistance Pact that alters ‘19 planting intentions. Soy has captured some of yesterday’s losses rallying over 6 cents today. There was push back from the Corn Growers Association and numerous US livestock groups (that desire a bigger piece of Gov’t payouts) which might delay a final decision. A 4 cent per bushel for corn farmers is 4 times larger than last year’s payout, but the total appears low to me vs $2.00/Bu for a soybean farmer.  The range of private estimates for US Prevent Plant (PP) enrollment in corn range from 3.5-10.0 Mil acres. This is massive in my view. If trendline yields (176.5 BPA) are applied to lost prevent plant acres, the production losses range from 600 Mil to 1.6 Billion Bushels. Weather the next two to three weeks will be the ultimate decider on the amount of prevent plant.

In my view we are not staying at current levels in corn and beans for that matter.Current EU weather models show another wet week in much of the Midwest next week (May 27-June1). Regardless either weather cooperates or it doesn’t to get producers in the fields. Producers in my view should start looking at both sides of the market to take advantage of this latest corn rally while potentially looking at put/call relationships for hedge strategy. These include the following strangles:

Bullish Corn Strategy: Buy the September 19 corn 410 call for 21 cents. Sell 2 of the September 380 puts for 12.4 cents apiece. Collect 4 cents or $200 per 1 x 2 ratio minus commissions and fees.

Bearish Corn Hedge Strategy: Buy 1 of the Dec 19 corn 4.00 puts for 18 cents. Sell 2 of the Dec Corn 520 calls for 9 cents apiece collecting 18 cents. Ratio costs even money minus commissions and fees.

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