Grain Spreads:Battle Royal

Sean Lusk General Commentary Leave a Comment

For the last week or so massive short covering in the grain complex has been in full effect led by extreme short positions held by managed money funds. The COT data showed these funds record short in the amount of 735.900 contracts short as of 5/14/19. The combined short encompassed all three wheat contracts, the soy complex and corn. Last Friday saw funds reduce that record short 255 K contracts coming in short approximately 479 K as of last Tuesday 5/21/19. It appears to me that position has been reduced significantly again as funds re-enter the ring and further cover. Historic rains, unseasonably cold weather, rising rivers, flooding, tornados, and wind damage have left the vast growing areas of the Midwest a muddy mess. Funds have finally taken notice as corn and soybean plantings are woefully behind 5 and 10 year averages and have funds scrambling to cover amid lower projected future yields. The Gov’t has taken notice too as the USDA announced a Trade Mitigation plan for farmers due to the trade war with China while potentially offering disaster relief due to US weather. The devil is in the details regarding these plans and proposals to aid producers and support prices. To nobody’s surprise the gov’t plans were confusing to most amid complication and lack of specifics. Its just plain confusing on how they aid the farmer. To me its left price direction predicated be weather and its impact on future yields.

Last night planting progress for corn came in at 58 percent planted vs a five year average of 90 percent and 90 percent last year. The biggest delays are in the Great Lakes areas and the Eastern Belt. Number two corn producer Illinois came in at 35 percent, Indiana 22, Ohio 22, Michigan 33, Wisconsin 46, and South Dakota at just 25. These are major producing corn growing areas where major rains struck again over Memorial weekend into this week and are forecasted to hit again this weekend especially in the East. Corn gapped 10 cents higher on last nights open and traded 18 cents higher overnight, up to 4 year highs at 4.38 July corn. Producers rushed to hedge new crop above 4.40 and 4.50 as basis levels softened. Futures struggled to regain footing finishing down 1.4 cents on the day. While forecasts are continued wet into and through the weekend particularly in the Eastern Belt, longer range models show warmer and dryer throughout the Midwest in the 6 to 10 and 11-15 day forecasts. The market took notice of the most recent forecasts and sold last nights corn rally. Still though I think you buy dips in this market. We won’t get fully planted until deep into June if Mother Nature allows and there’s the question of weather during key yield development time deeper in summer. Will farmers switch a sizable amount of corn acres to beans? Will weather be optimal for condition? Future yield loss due to late planting? Questions that need to be answered before any major reversals in corn are scored in my view. I’m looking to buy any dips in July Corn and 412 and then 4.07 in the near term. Stop loss at 3.97.

For Soybeans, the planting situation isn’t as dire as you can plant beans into 4th of July weekend and still have good yields in some areas. Funds though were still short over 150 K contracts into Memorial Day in my opinion so the short covering bonanza that spurred prices higher in Corn and Wheat the middle of last week has just emerged in Beans, Meal, and Bean Oil this week. US plantings came in at 29 percent planted vs a five year average at 66 and 74 percent last year. Number one producer Illinois at 14. Iowa at 32, Indiana 11, Ohio 11, and South Dakota at 6. Its late and producers are likely out of the Ring this week in many areas due to water logged ground. However should the planting window open up by Mid June, this crop will get planted with lightning speed should growing conditions allow. Like corn, there are many question marks remaining on future bean acres and yield. I think until then funds short cover until they do know what this crop is or isn’t. I would use options here and buy the July bean 9.00/940 call spread for 5 cents. Or look to buy futures on a dip at 863, with a stop loss under 850. Please call or email me with any questions at 888 391 7894 or slusk@walshtrading.com

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