Commentary: I am still of the opinion that we will start to see some type of food/grain inflation entering into the market soon. It comes on potential stimulus efforts that will be injecting millions of dollars into the market to shore up sections of the economy that have been by the Covid-19 virus and by weak energy sectors. The fear for the next two months will be that no pathway to a vaccine or cure is produced and that global commerce is severely halted as more quarantines emerge. As of this post all March Madness College basketball games will be played but without fans. We are seeing the same type reactions globally at sporting events, trade shows, anywhere where sizable groups of people gather. Restaurants may eventually suffer which may curtail beef demand. In fact demand for all things near term would suffer in my view as front month contracts across the Board cant sustain a bid vs the back months. However the lack of demand near term in my view is only going to bring back better demand longer term for grains. Countries chewing up their own reserves to feed their people due to the lack of commerce will need to replenish their reserves. Just my opinion. I could anticipate some funds that maybe sitting on the sidelines due the exit out of equities coming into the grain space buying dips amid better demand chances down the road. If a weather issue enters into the market like a LaNina, which by the way is getting more attention as a possibility for summer arrival in the Midwest, the potential exists for a rally. Granted it is a long way off but I’m looking at potential bargains where I see value. Therefore I am suggesting we take a position in Corn usign September options to capture an upside retracement for a possible corn rally to near last years highs.
Trade Suggestion(s):
Option Trade: Three way option trade using September 2020 Corn Options. Sell the September 2020 400/450 put spread and buy the September 430 call. This three way option spread settled today near 35 cents. I would look to sell it above the market at 40 cents. Corn would need to break some more to get filled at my target price.
Risk/Reward: The risk on the trade is ten cents ($500.00) plus commissions and fees. Remember one is collecting 40 cents per spread upon entry. The optimal move for this position is to see September corn settle above 4.50 in late August. This is a static long in the market where risk in my view is defined and requires less initial margin upon entry. Given the headline nature of the current enviroment, I would opt for this type of strategy rather than futures or spreads currently.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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