Grain Spreads: To Turn or Not to Turn

Sean LuskGeneral Commentary

While talk of weather events in much of the Midwest speak of planting delays, funds remain undeterred comfortably awaiting the supply/demand structure to change. If no demand comes in to alter balance sheets then weather events will be needed to prod funds who sit on a massive 600
K short position to begin to cover positions. Until then its been more of the same lately as all wheat classes and the soy complex search for a bottom. Corn showed some life into option expiration as those long puts covered futures from yesterdays spot low in July at 351.4. Funds though are estimated to be short a whopping 360 K corn contracts, an all time record number. Seems daring given the Northern plains and Great Lakes areas haven’t seen much planting progress to date. A snow storm is bearing down this weekend amid further rain in the forecast deeper into next week could be keep plantings delayed. Old timers in the trade say that late planted corn brings upon lower yields but for now it doesn’t matter. We will see if it matters in a couple weeks if planted area is still woefully behind schedule regarding 5 and 10 year averages. The only market taking any pre-cautions is the oat market. Oats continue to add weather premium based on substantial delays in seedings and ongoing wet weather expected across the Dakotas, southern MN and much of TX. Spot oats sit at $3.08, a new 5-month high. Note: Oats are a non exportable feed grain where demand is inelastic.

I’m not seeing much in the way of opportunity in old crop/new crop spreads at this point. There’s too much grain on hand near term for a rally in those spreads. Shorting at these levels may allow for one to eke out 3 to 5 cents prior to front month expirations. Not worth the risk in my view. Spreads at this point worth watching would either be DEC19/Dec20 corn or Nov 19/Nov20 soybeans. They both are trading at a sizable carry at 30 cents under for corn and 40 cents under for beans. In my opinion not normal for this time of year when the crop isn’t even in the ground yet. In normal years they don’t see this type of pressure or carry associated with them until the trade has a good idea what kind of yield is on the horizon. This year is different for a myriad of reasons with tariffs and the USDA’s crazy math to name a few.

Dec19/Dec 20 Corn. We previously bought at 16 to 18 cents under, stop loss at 22 under in March and were stopped out the last day of March when the USDA gave us the surprise bearish corn report. (Still Bitter). Now we sit at 30 cents under after posting a low at 33 under yesterday. If corn turns higher so will this spread in my view. Buy at 31 under stop loss at 34.4 under, risking 3.4 cents. Objective to 24 cents then 16 cents Dec 19 under.

Nov19/Nov20 bean spread. Buy at 41.4 under, stop loss at 48 under risking 6.4 cents. Objective is to 26 cents then 23 cents under. You enter into this spread if soybean futures can hold support here. Use 865.6 and 857 next week. If we hold these levels next week in July beans and close over 873.4, look to be a buyer here looking for the Nov 19 contract to tighten vs the Nov 20. Could be a quick 10 to 15 cents on this spread into May especially if we see planting delays deep into May or something bullish enters into the market. (Trade agreement, weather)

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