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Grain Spreads: Christmas in May


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Commentary: The USDA today announced another round of farmer aid
payments based on either half of 2019 production, or total on
farm stocks as of January 15th, at 45 cents per bushel for soybeans,
32 cents for corn, and 18 cents for hard red spring wheat. Funding
was also announced for payments to specialty crop and livestock
producers. These payments come in the form of Covid 19 assistance as ethanol and feed demand have been significantly reduced due to the virus. Export demand has also been severely reduced again as Countries around the Globe due to reduced commerce, have opted to reign in their own supplies and deplete their reserves. I have been talking about this possibly being bullish in the long term as monetary easing and money printing has expanded at a record pace. Combined with thoughts that should these reserves eventually need to be replenished, it could create a bid in the grain market in the late third quarter/ end of year time frame. If you throw in weather issues that curtail production, an uptick in volatility amid sizable rallies could be seen. To be clear we are not in that enviroment. The US is the second or third rung on the global export ladder for corn, wheat, and soybean sales. Its simply cheaper for major buyers to buy from South America or the Black Sea as those currencies are significantly cheaper than the Dollar. Brazil is currently selling a lot of beans to China, one reason is because the Brazilian Real is low and the American Dollar is strong. Brazilian farmers are paid in American dollars for the beans and their expenses are paid in Reals. For obvious reasons I think the US farmer would rather have market share returned instead of filling out forms for aid payments.

Last week the USDA in some shape or form gave us bearish data on soybeans, corn, and wheat. If it wasn't domestic ending stocks that came in bearish, the USDA gave the market bearish global ending stocks data for both old and new crop ending stocks. In my view they have made some aggressive assumptions globally on future production. The numbers will be adjusted in future reports most likely as Mother Nature will have the final say on crop tallies. One area that was noticeable for me was the 20/21 soybean ending stocks number at 405 million bushels. While ample and a good cushion, its lower than two crop seasons ago at 438 million. Prices prior to the Trade war in 2018 sat between 9.30 and 10.80. I see this ending stocks number as low and a potential buying opportunity should weather emerge. On the flip side I think the number also represents assumed China buying to meet the terms of the Phase One Deal. Until we see either demand or weather problems, rallies will be sold as the deflationary enviroment the grains are in currently could persist. This time of year though a short term rally is favored in my view as uncertainties abound over the planting and growing season. Two trades to consider. One is a futures spread; Nov20/21 soybeans and the other is an option trade for something way down the calendar. Below is the November 20/21 bean chart.

This image has an empty alt attribute; its file name is ZSX20_X21SP-Daily_05192020_022450pm-1024x471.jpg

Trade Recommendation

Futures: Buy the Nov 20 soybean and sell the Nov 21 soybean spread at parity or zero. (upward trendline)

Options-Sell the July 2021 11.00/10.00 put spread for 93 cents.

Risk/Reward

Futures- If filled, place a GTC sell stop at 8 cents Nov 20 under for a risk of 8 cents or $400.00 plus commissions and fees. Im looking for an eventual rally towards the gap for a 14 cent gain or towards the high of the year at 32 cents Nov 20 over.

Options-Long term bet with defined risk. This strategy collects 93 cents ($4650.00) minus commissions and fees upon entry. The goal is to sell high and buy back low with a static bullish position. We are looking for a rally down the road and to buy back this spread for 45 cents. Risk is seven cents or $350.00 plus trade costs and fees.

Please join me for a free grain and livestock webinar at 3pm Central. Signup is free and a recording link will sent upon signup. We discuss supply, demand, weather and the charts along with trade idead both hedge and speculative. Sign Up Now

Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

312 957 8103

888 391 7894 toll free

312 256 0109 fax

slusk@walshtrading.com

www.walshtrading.com

Walsh Trading

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Chicago, Il 60604

Walsh Trading, Inc. is registered as a Guaranteed Introducing Broker with the Commodity Futures Trading Commission and an NFA Member.

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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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