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Grain Spreads:No Rush


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Commentary:

I'm posting two charts here with a few thoughts on corn and beans moving forward. The USDA in their last two supply/demand reports assumed sizable demand for Soybeans from China and assumes a bumper crop this year for Corn. It also assumes record global ending stocks for Wheat. I pay little heed to their global wheat estimate as they add China ending stocks into the total. China is not a global exporter of wheat or any other grain for that matter and Im not sure how viable the data is coming from them given their recent history. The USDA is assuming soaring wheat production globally for the 20/21 growing season. Mother Nature will decide that and further adjustments for all three grains will be made through crop reports through November. Beans and Corn look like they want to push higher but remain range bound. Dec 20 corn is coiling again trading in a tight wedge. It tells me a bigger more protracted move is coming. But which way? Given this time of year, I would opt higher due to weather uncertainties amid a Brazilian corn crop that keeps getting downgraded. Granted its not much of a correction in my view, but final production numbers may result in a 5 to 8 percent less production than originally thought.

USDA pegs 2020-21 corn ending stocks at 3.318 billion bushels, which is a 33-year high for surplus corn stocks. Yet, prices remain well-above levels seen in the mid 1980s. There's no doubt that 3.3 billion surplus corn bushels is a lot, but the current slump in demand related to ethanol could be seen as temporary, and the overall demand base is much broader today. Much of the surplus corn in the mid-80s was also under government support programs, which weighed heavily on prices. Holding recent lows
though likely necessitates a relatively quick recovery in ethanol consumption. Take a look at the Dec 20/21 corn spread below. Its been bottoming at 33 to 30 cents Dec 20 under. I think that a buy here with a tight stop under the recent low into June is warranted. Tight bet, with good reward in my view on a short covering bounce. Remember funds short approximately 250K contracts. They most likely have the profit and therefore the risk. I wouldn't be surpirsed if they didnt short cover some into the 4th of July regardless if the corn is knee high by then. Daily Dec20/21 corn below.

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Beans have the big demand assumption from China figuredinto USDA balance sheets. Even the US AG Secretary Perdue predicted better soy demand from China come Summer. Has recent saber-rattling between the two nations offset future demand? If so beans will need a sizable weather market to trade higher or in my view we will eventually see a 7 handle behind them. On Tuesday, USDA announced 258,000 MT of mostly new-crop soybeans sold to China. Imports remain a cause for optimism. If China perceives Brazil as a less reliable source, given potential Covid-19 disruptions, it could push China to increase domestic soybean stocks from U.S. inventories. Brazilian President Jair Bolsonaro could be the first world leader to be toppled by the coronavirus pandemic as the leader faces intensifying political pressure for his handling of the public health crisis. South Americas largest country has emerged as the worlds No. 2 global hotspot for Covid-19, with more cases reported nationwide over the last week than any other seven-day period since the outbreak began. Chinas parliament votes today to approve the new domestic security measures governing Hong Kong. President Donald Trump has threatened economic reprisal should China increase, what is viewed, as anti-democracy pressure on Hong Kong. Our markets have the political risk that the U.S. response destabilizes China/U.S. trade. The market is hopeful that calmer heads will prevail, and the U.S. response will be harsh rhetoric rather than destructive new tariffs. I believe this more than anything have held beans from further rallies.However if we see a port or dock worker shut downs in Brazil over Covid, this old crop/new crop bean spread could benefit in my view.

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July/Nov 20

Trade Ideas:

Futures: Buy the Dec 20/Dec21 corn spread at 31 cents Dec 20 under. Stop loss at 36 cents Dec 20 under. Buy the July 20/Nov20 Soybean spread at 7.4 cents July 20 under with a stop loss at 14.4 under

Options-N/A

Risk/Reward

Futures-Dec20/21 corn spread has a risk of 5 cents plus commissions and fees. If filled at 31 under with a stop loss at 36 under. Im looking for this spread to trade to a fifty percent retracement area at 14 cents Dec 20 under. For the July20/Nov 20 bean spread, look at buying at 7.4 cents July under with a stop at 14.4 under risking 7 cents. Im looking for this spread to trade back to the recent highs at 14 cents July over on a rally.

Please join me this Friday at 2pm for a free grain and livestock webinar. Sign-up is free and a recording link will be sent upon signup. 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

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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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