Grain Spreads: Report Day History Lesson

Sean LuskGeneral Commentary

If last years corn crop taught us anything, better yields amid dry weather in late July through August in 2017 in many growing areas resulted in higher yields not lower ones. This year an early planted crop and optimal growing season weather have yielded our best yield report ever at 181.3 BPA. This was 3.5 bushels per acre over the average trade guess and 2.9 higher month on month. While production isn’t a record, its early still with updated results to follow in November and January. Ending stocks surged higher as a result with domestic ending stocks 1.774 billion bushels, 90 million bushels over the avg trade guess. Given sizable US production, world carry out came in at 157.03 million metric tonnes, 1.54 higher than the average.

It’s a race to the bottom now with Dec 18 corn clinging to support at 351. A close below takes us to 341 and that level needs to hold or its 336 then 323. Bulls will cite world stocks to usage ratios and such following today’s report. I say trade the charts. The rule of thumb is once we get to 35 to 40 percent harvested, our low is in and we will look for a bounce. Harvest progress is at 5 percent, but with dry and warm conditions in the Midwest, combines will begin rolling shortly. Look to be a buyer off of 341 should we get there in Dec corn or look at dirt cheap calls to take a shot for a post harvest bounce.

Beans: the numbers were bearish but not as bearish as feared and beans rallied 8 cents. The biggest news for beans is that Secretary Mnuchin is meeting with the top Chinese trade delegate to re-engage on trade. We will see. The cynic in me says they may announce a framework in working towards a deal ahead of mid-term elections in November. It would most likely have China pulling tariffs on US AG products and be friendly for equities. Lots of “ifs” and “maybe’s” here but I wouldn’t discount such a result. Nov beans has resistance at 846.6. a close over and its 874.4. Support at 820, a close under and 780 is next.

Wheat-funds long into the report, got caught amid global ending stocks that rose 2.33 million metric tons vs expectations that they would fall by at least a million. If one was going to question the USDA on numbers, it would be today’s wheat number as its relies on overseas production estimates that some call guesstimates. We traded down to a fifty percent retracement level for both KC and Chicago at 504 and 501 respectively. Global numbers are still down year on year and vs 5 year averages with stocks to usage lower. These are knowns in the market however and for me demand needs to pick up here for wheat to hold the 5.00 level in both contracts. Major support is 4.97 in Chicago wheat. KC has major support at 491 and 487. These levels need to hold to push back up to 530 in Chicago and KC at 526.

Trade Idea-Soymeal

Lets look at meal for a moment. Non commercial and non reportables still long 58 K contracts, with managed money long 19 K contracts as of the last COT report. Why the long positions? Is it due to the lack of beans grown this past season in Argentina? Is it spreading vs soy oil? Is it a Fall seasonal that keeps funds from flipping to a short position? It’s peculiar to me why Dec 18 soy meal is trading to an inversion (higher) than Dec 19 at  6.0 tons over as of today’s close. In my view I cannot see soymeal trading between 310-320 basis Dec 18 and see Nov 18 or Jan 19 soybeans breaking 50 cents to 790. In my opinion either  Dec 18 meal has to break below the near term low at 303 and challenge 293,  which is last years low or even move all the way down to 262, the 2016 low if the soy complex is going to collapse amid bearish supply side data. If soy meal doesn’t break, I think beans hold at or near these current levels and rally. Just my opinion here but with this in mind I think one should consider the following.

Buy the Jan meal 280 put for 1.00 ($100.00 plus commissions and fees).

Buy the March 19 350 call and sell the March 19 4.00 call spread for 3.8 points (380.00 plus commissions and fees)

In my view have positions on both sides of the meal market into year-end as news of trade deals along with weather events can enter into the market unforeseen. If one researches what meal has done the last four September’s post Labor Day weekend, the charts tell us that an expanded move maybe coming. It’s hard to tell yet direction, so I’m placing orders in both directions.

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