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Grain Spreads:Squeezed


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New tariffs that are looking to be imposed by the US on China drove the grain price lower yet again. The tariffs were announced after the grain close yesterday as beans closed unchanged with corn down just three cents on Tuesdays close. As markets gapped open lower on last nights open, the bean trade is in search for a bottom as soybeans will likely feel the brunt of the trade war with China. This new round of tariffs that are to be imposed encompass $200 billion worth of imports. More importantly it all but cements that Chinese demand, who by the way accounts for 60 to 70 percent of our exportable feed grain, could be absent from the market until the 4th quarter at the earliest. I do believe that no matter what that eventually our feed grain (beans) moves to China through other trading partners. Currently growing conditions for the most part are optimal which by the way is the real story here. Therefore we haven't seen much in regards for a supply side rally. i.e. (weather premium). These tariff scares are a demand driven black swan that has entered into the market that has funds selling rallies awaiting any input from the Trump administration or a weather issue to book profits. The real loser here is ultimately the US producer if the trade war persists. This to me is turning into the bizarro grain trade where rallies might not occur until right before harvest while we search for a low prior to key yield development time for beans.

Corn meanwhile can't find a bid and leads me to believe that new crop corn might not find a bid until 348 is tested and perhaps 339 before we see a bounce. Funds could push out to a 150 K contract short from the 70 K as of last Tuesday prior to covering. While there are small trouble spots, corn condition like beans has outperformed vs 5 and 10 year averagesand is well advanced at this stage. With thoughts of higher ending stocks and a trade war to boot, there's not many reasons to buy at this point. Longer term there's a bullish story for corn as world ending stocks particularly out of Eastern Europe and South America come in lower. To turn the tide quickly, we need to see a smaller increase in ending stocks than previously thought for tomorrows supply/demand report while any forecasted rains need to miss the major growing areas in the next two weeks.

The administration can do a 180 turn on trade as it relates to AG. If it happens or rumors swirl the result in my view would have corn and beans up appreciably.

Here are trades worth considering for beans and corn should we continue lower but I think decent spec plays as well.

Corn

Buy the Oct Corn 350 put (serial Dec option) and sell 1 May corn 450 call at even money. This settled at 3.4 today. If exercised on the puts one would be short Dec corn at the end of September at 350. Again I'm not crazy about being short calls that far out but If I see a turn in corn, if I get long May futures at 380, being short calls at 450 maybe a good target.

Beans

Sell the Sep 18 8.00 put and buy the Sep 18 780 put for 7 cents. Risk is 20 cents here using options to close the position. Buy the May 19 Soybean 980 call and sell the May 19 1080 call for 11 cents. If beans continue to break I have support potentially testing 783. I don't think they will stay in the 7 handle for long. If they do so be it, one would most likely have the opportunity to buy the put spread back at a scratch at or near expiration in my opinion. The key here is to finance a call spread 9 to 10 months down the road that could yield a sizable return of 50 to 60 cents per spread later amid a whole host of reasons. Both trades as a package costs 4 cents plus commissions and fees. Just my opinion here but if looking to catch a dip, sell near term puts to finance long-term calls using options. This break is affording you that opportunity in my view if looking to catch a wave higher after the chaos and panic of the tariff talk.

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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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