Grain Spreads Gameplan by Sean Lusk
Sep 05, 2018
The next big mover for grains could be next Wednesday’s crop report at 11 am. In reading the charts and studying trend lines and recognizing what time of year it is, I would posit that one consider the following courses of action in the following markets. The rule of thumb for me is that once corn and beans are 35 percent harvested, that our corn and bean lows are close to being in and a post harvest rally may occur. My opinion here.
Wheat: Funds long KC and Chicago over 50 K contracts of each according to the latest COT data. Its still a sizable long. We noted on last Fridays report that we thought the market was bid into the weekend on thoughts that Russia was putting export quotas on their wheat due to their poor growing season. The Labor Day announcement from Russia’s Ag minister offered no such export cuts and as a result Kc wheat is down 30 cents from last weeks settle, while Chicago is down approximately 23 cents. Chicago from a technical level looks weaker in my view as it sits below all major moving averages with a 50 percent retracement in the crosshairs at 501, a realistic target. KC is holding at near term major support at 526.4. A close under and I think 5.04 is next. That is halfway back for the year. Minneapolis wheat and corn have gained on these contracts as a result. There are major trendline support levels for both contracts at 4.94 for Chicago, and 4.88 for KC. Next weeks report could show world ending stocks continuing to decline. That is friendly for price and maybe enough to keep any major liquidation from taking place. In my view bulls need to be fed, so an increase in wheat demand from the US or another weather story would need to drive us significantly higher from here.
Corn: the market is pricing in a September yield between 177-179. A 180 print on yield which would be a record would have us down at least 15 to 20 cents on report day (9.12.18). My opinion here. I don’t think we will see a report day surprise as I thought the USDA was too aggressive in August. If anything a surprise would be bullish. Eyes will be on global production, stocks/usage and domestic new crop ending stocks on report day. Funds short 50 K as of last Tuesday. Dec corn settled 365. Major support is 350, resistance 376. Strangle is the preferred play.
Short position: Buy 1 of the March 360 puts for 9 cents. Sell 2 March 340 puts for 3.4. Spread cost 2 cents. I’m financing the 360, by selling 2 340’s and really am only interested in squeezing as much as I can out of the 360 put as I don’t mind being an owner of corn at 340 , if exercised on the options.
Long position: Buy the May 390 call for 19 cents. Sell the May 390 put for 24. collect 5 cents. Buy the Oct 18 360 put for 3 cents.
Beans: Its been a race to the bottom here as tariffs have eroded demand amid a big crop supposedly getting bigger. Last month the USDA had yield at 51.6. now I’m hearing talk of 53.5. My target is 52.1 but its only a guess. I believe the USDA will be a little more conservative than last time. Yield is one thing but ending stocks are another. There is talk of seeing beans at over 900 million for a carry. Note: China has been in contracting 18/19 beans for future shipment according to the USDA in 4 of the last 5 weeks according to export sales data. Market noise that they are out of the US market completely is to me just noise. The problem for beans technically is there is not much support if the market trades and settles under 820-826. Support doesn’t enter in until 780,then 765, which is 20 percent lower for the year. Strangle is the play and its aggressive.
Buy the Nov Bean 8.00 put for 7.4 cents. Sell the May 19 740 put for 5.4 cents. Similarly to the corn trade, I wouldn’t mind owning beans at 740 basis May 19.
Long Term: Buy the March 19 940 call for 16 cents. Sell the March 1020 call for 7 cents. Sell the 1060 at 5 cents. Cost is 4 cents. Risk is over 1140 March beans at option expiration.
Soymeal: Low risk good reward in my view: Buy the March 19 350 call and sell March 19 4.00 call. Vertical call spread for 3 points or $300 plus commissions and fees. Max collection is 50 handles or 5K minus the cost of the spread and commissions and fees.
Please be aware of all the Geo-political tensions regarding trade deals and the political chaos in Washington. Trade the charts and let them be your guide for entry and exit or for staying on the sidelines. Please feel free to call or email me at anytime to discuss these suggestions or if you are looking for an idea or a second opinion. We can email you our charts per request. 888 391 7894 or email me at email@example.com
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