Grain Spreads: Wheat, Corn and Bean Thoughts

Sean LuskGeneral Commentary


According to a few sources as of this weekend 70 ethanol plants have now shut nationwide. The result is that they are returning more than 1 million tonnes of corn into the U.S. balance sheet every week.  This equates to 39 million bushels per week which is not quite as much corn as we have been exporting. That has done in corn for now, although the economy restarting along wth a potential weather issue emerging would certainly change the psychology in that market. While recent U.S. sales for future shipment for soybeans into China is a positive development, it pales in comparison to what they are buying from Brazil. Since 4/23/20, the US has sold 778K metric tons of beans into China, which includes this mornings purchase of 378K. Brazil in the month of April has sold 16.3 million metric tons to China. Its a record amount of beans sold in one month to China and 9.4 million metric tons above what they sold in April of 2019. In the last three months, Brazil has sold approximately 42 million metric tons of beans to China, or 1/3rd of their crop that has just been harvested. Which is why I’m bullish beans long term (Nov/Jan) timeframe as Brazilian supplies will possibly be tight come late 3rd and into the 4th quarter, as they are selling record amounts near term.

Turning to wheat, this was the market that could of had the most bullish grain story for 2020 and it still might given drought in Europe and Black Sea growing areas along with lower production and reduced ending stocks in the US. The wheat market saw sizable rallies in March once Covid hit, as the more people stay at home, the more starch they consume. A weak economy also promotes this in theory in my view. The USDA has touted that global wheat ending stocks are at all-time highs, at least in their last supply/demand report in early April. The USDA cited that global ending stocks rose 5.6 million metric tons for all wheat classes citing significant raises in ending stocks in China and India. It was a bearish report day surprise. What they left out is that China holds 51 percent of the Worlds wheat and they are a non exporting nation. Therefore their stockpiles in my view shouldn’t be factored into global balance sheets since the Chinese don’t compete in the global export market.

This morning private crop forecaster Informa cut their 2020 U.S. winter wheat production estimate by 32 million bushels, to 1.207 billion bushels. That’s now down 97 million bushels (mbu) from last season. In their World Crop Report they reduced a bevy of production estimates
including Brazil 2019 corn 2 million metric tons (MMT) and Argentina 2019 corn 3 MMT (to 124 and 50 MMT, respectively); Russian 2020 wheat fell
2 MMT to 80 MMT with Ukraine down 500k tonnes to 27 MMT,
while Russian corn production rose 800k tonnes this month to 13
MMT. Oklahoma crop experts pegged the state’s 2020 winter
wheat crop at 96.5 million bushels, with an average yield of 33.2
bushels per acre; that production figure is down from 110 million bushels in from the USDA estimate in 2019. The USDA’s number is what matters most to trend and index following funds in my view. Next Tuesday, at 11 am Central we will get another look at supply/demand estimates for corn, beans, and wheat from the USDA’s WASDE report. I hate playing conspiracy theorist here. Outside of weather threats that significantly curtail global wheat production estimates, I don’t think the USDA will allow wheat futures to rally from their data. I therefore look for bearish wheat numbers next week given the virus concerns as its my belief they dont want to see wheat futures rally passing those costs to the consumer. Not in our current enviroment. Those looking for an idea for downside exposure into the report, use June options that expire on 5/22.

Trade Idea:


Options-Buy the June 2020 Chicago Wheat (ZWM20) 5.00 put for 5 cents OB.



Options-the risk if filled at 5 cents is $250.00 plus commissions and fees. I would put in an exit at 20 cents on a GTC if filled on report day as I predict the market will test longer term supprt above 480.

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