Grain Spreads by Sean Lusk
Jan 08, 2018
There were no fireworks to speak of regarding the grain market to finish the first week of 2018 as a weaker than expected export sales soured any buying. Corn and wheat sales for future shipment came in both at marketing year lows at 101 K metric tons and 131 K respectively. While expectations were dampened due to it being a holiday week, export sales missed pre-trade guesstimates by a wide margin. Beans came in at 554 K at the low-end of expectations and also a marketing year low. Beans traded 10 cents higher overnight before giving back the gains during the day session. Wheat’s losses came on the heels of corns gains as the Chicago wheat/corn spread retreated over 7 cents in the last two sessions before settling at 79.4 wheat over corn. March beans traded up to trend line resistance at 976.4 and fell apart to finish around 970. While funds short covered this week over potential weather issues in Argentina, the weather in northern and central Brazil remains ideal. Without a weather premium, demand needs to pick up to drive prices higher. However China’s buying from the U.S. in the soy complex has been spotty at best. They come in buying one week but then disappear for a time and turn their needs to the Southern Hemisphere. This is almost opposite of last year where crop sizes the year prior for both corn and beans were much less. This turned the U.S. as the primary port for strong Asian buying in both beans, bean oil and meal. Consider this stat. Brazil’s December soybean exports were seen at 2.36 million tonnes in December, up a whopping 261% from last years 653 K tonnes. The exports to China came in at 2.05 million tonnes, up 328 percent from last year’s 480 K. The bearish shell game being played by China is bearish for demand. Due to the strong Brazilian exports to China, the trade is looking for a lower export number on next weeks USDA report (Jan 12th), which could raise ending stocks yet again. Stay tuned. We will be doing a special email blast ahead of next weeks report.
Eschewing the spreads for a moment, I want to take a look at corn and perhaps some option spreads one could take advantage of.
Below you will find two charts. The first represents weekly corn volatility. On this you will see a long-term cycle study and the underlying price reactions accompanying each of the marked volatility advances. The cycle timing points to another change of landscape on schedule for the early part of this year. The second image is a weekly corn futures price chart. On this chart you can observe geometric extension lines and channels along with rectangular markings. These markings are overlaid timing structures. Our first upside projection comes in at /-403 with a second tier extreme at /-452. The lower level objection looks to be fulfilled by the end of March while the overhead exit on looks to the late summer months. The previously mentioned cycle study timed advances accompanied by the future’s price reaction show an average increase of price of more than 80 cents going back over 5 years. Tying all this together has us favoring bullish option strategies.
Below are three examples of trade suggestions each having different levels of aggressiveness depending on one’s risk parameters.
Aggressive Option Traders
Buy 1 July 380 corn call for 11 cents
Sell 2 May 340 puts (Late April expiration to finance the call) for 5 cents apiece, collecting 10 cents.
Spread cost=1 cent ($50.00 plus all commissions and fees)
Conservative Options Traders
Buy the July 380 corn call
Sell the July 400 corn call
Spread price 4 cents or $200.00 cost plus commissions and fees. Max profit 20 cents at option expiration late June if both strikes finish at the money giving one a 1 to 5 ratio.
Futures Spread July/Dec 2018 corn spread (Old Crop/New Crop)
Looking at the chart below this spread has baselined in a two to three cent range for almost 4 months. With funds short 200 K in corn a breakout from the wedge here could lead this spread higher to an inversion. Currently we are at 16.6 cent carry. Risking five cents from entry, we would look to buy this spread at negative 16.6 cents July 18 under Dec 18. Objective would be to 8 cents over. Risk 5 cents from entry with a profit objective of 24 cents.