Grain Spreads: Second Bull Run

Sean Lusk General Commentary Leave a Comment

Now that the December crop report is behind us with hardly any surprises and virtually no adjustments to US crop sizes, the market goes back to watching trade developments with China, and weather in South America. To me these are the two biggest determinants for price. Recent headlines the last 24 hours showing an unprecedented 1.2 billion bushels of corn still out in the field in the Northern US growing areas along with passage of NAFTA 2.0 finally by the US House this morning was not enough to stir funds too cover shorts in corn, beans, and wheat just yet. Who knows if that will matter at all? We wont hear from the USDA again until January. Tariff and trade war drama with China could be kicked into 2020 with a delay on tariff increases of Chinese goods on December 15th, essentially kicking the can down the road on any percentage increases.

In making a case for higher prices longer term for the soy complex, wheat, and corn would have to include a weather market or induced rally. I don’t see the USDA coming to grips with reality that they have most likely over estimated last years crop by the time the January report comes around. It will most likely be the March quarterly stocks report at the earliest. I wrote last week that the one grain market that has showed life is Soy Oil over the last two months. The rally comes on palm oil shortages in Asia amid drought and a lack of demand for meal due to ASF. Trades to consider below:

Bean Oil (Chart below) Should this rally sustain overtime, here is a trade to consider. Sell the July 2020 Bean Oil 36.00/34.00 put spread at 1.60. At the same time, buy the July Bean oil 36.00 call for 50 points. One collects 1.10 ($660.00) per three way spread minus commissions and fees. Risk is 90 points or 540.00. Upside is theoretically unlimited as we are long a call and short a put spread.

KC Wheat-Same type strategy. If we get a weather market, we could rally 1.00 to 1.50 on futures. US plantings could come in at 109 year lows if validated by the USDA in January to confirm with private estimates. Not to mention domestic ending stocks below 1 billion at 970, reduced 40 million on increased exports. Bad crop this year reduces that number further. KC July 2020 wheat near 450.0. Weather rally could push us to 5.50 and then last years high at 5.98. Then again it may go nowhere and top near 4.80. If bullish here is a trade to consider. Sell the July 2020 KC Wheat 6.00/5.00 spread at 91 cents. Risk here is 9 cents or $450.00 plus commissions and fees. Use the collection to buy the July Kc 5.00/5.50 call spread for 6 cents. Collection is now 85 cents or $4250 plus commissions and fees. Risk is 15 cents or $750.00.

Corn-Many reasons to be bullish long term. In my opinion ending stocks are at least 500 million bushels less than whats being given by the powers that be due to lower production this crop year is my belief. When will this years losses show up? We may not find out until next September. Yet what is going to prod the funds to cover and then build a long position? Weather and trade are two immediate reasons in my view. I want to bet as long term and as realistic as possible. In my view look all the way out to March 2021 corn. Sell the 5.00/4.00 put spread at 80 cents. Collect 4K. Use the collection and buy a call spread, perhaps the 450/500 call spread for 6 cents. This market more than any other, I suggest a static long longer term. Risk is 26 cents or $1300 per spread. We can adjust strikes and even go further in to 2021 for strategies.

Beans-Pre tariff highs in April 2018 at 10.82. That is where the market will go in my view on a weather rally. Drought in South America was the reason back in 2018, then the trade war and the floor collapsed in the soy complex. Recent rallies pushed beans near 950 from 791. Mostly on short covering amid weather scares at home. Big wild card here on final US production. Like Corn,areas in the North reporting lost bean production. Ending stocks could be over a billion bushels less in January year on year. We have had no adjustments to the bean numbers since October where ending stocks were revised lower. Sell the July Soybean 11.00/10.00 put spread at 90 cents. Collect 4500.00 minus commissions and fees Ten cents risk or 500 per spread. We will add longs/shorts closer to report day.

The goal of these trades is to collect money on the way in and hopefully on the way out. Regardless at some of these percentage thresholds, the odds of selling option spreads at the 90th percentile of a no greater than Dollar move, gives us the mathematical probability of selling high and buying low. No guarantees here , this is my opinion.

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