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Grain Spreads: Delayed Reaction


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Beans finished 15 cents lower today as the search for the bottom continues in soy. Enhanced tariffs on China and optimal growing weather were the culprits again this week which has become an all too familiar refrain in the grain market. The move lower today in soybeans is something that I thought would have occurred on report day which was yesterday. While the USDA report left yield alone at 48.5 bushels per acre from last month, new crop ending stocks were revised higher to 580 million bushels, well above the average trade guess at 471. This would be a record. An increase in yield to 50 BPA puts ending stocks over 700 million which could pressure the market further in the weeks and months to come. Yesterday we traded 10 cents lower on the report release, but finished the day unchanged. Overnight beans rallied 5 cents on the open and then the selling emerged and didn't stop until mid Friday morning. This has given thoughts to beans trading down well below 8.00 across the board should there be no weather hiccups. It also assumes that the Trump administrations follows thru with its pledge in placing an additional $200 billion of tariffs on Chinese goods by late August. We shall see as trade deals and the saber-rattling can change with agreements, waivers, delays, extensions, or even tweets that can alter the demand side of the ledger at any time. If one is looking at downside targets, there is a ten-year low down at 776 (Dec 31, 2008 low), and a downward trend line converging at 783. We began the year just below 960 in beans. A case can be made that if the funds keep pushing and adding to short positions given the current environment, that a 20 percent move lower would push us down past 783 and 776 to the 760 level before we get a measurable bounce. I'm not saying this will happen, but 20 percent moves become targets for some funds in my view and sometimes are met with profit taking and short covering. Such a move lower would put beans well over 30 percent down from the highs back in late May. Should we get this push to lets say 770 in beans for argument's sake consider the following trade. I love getting long the deferred bean contracts basis March or May 2019. With this in mind consider the following trade.

Sell the November 18 bean 780 put and buy the November 18 bean 760 put. Sell this put spread at 8 cents. Risk is 20 cents at expiration

Buy the March 19 940 call and sell the March 1040 call for 10 cents.

Package here would cost 2 cents ($100.0) plus commissions and fees.

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About the author


Sean Lusk is a registered commodity broker and Director of the Commercial Hedging Division of Walsh Trading in Chicago. Sean began in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Sean began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.

Now, at Walsh Trading, Sean utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.  

He writes daily and weekly commentaries focusing on both the Precious Metals and Agricultural Markets along with related market activity.

Sean has been quoted in various media outlets discussing futures markets. 

These include:

 

  • Futures Magazine
  • Reuters
  • Forbes
  • Kitco
  • Nikkei Press
  • CCTV.com

 

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