Grain Spreads There is Still Time by Sean Lusk
Jul 09, 2018
The month of June was no friend to the corn and bean producer regarding price. Sure it afforded those who didn’t get the crop in during May ample time to finish planting. Weather though was so optimal for planting then early development that it erased any buying or weather premium being built in the market. Then came the tariffs which was a major rug pull on not only funds but spec longs as well as prices plummeted. This past Friday saw a much needed profit take occurring as beans rose 40 cents, corn over 10, and Chicago and KC wheat up 15 by the close. Sunday nights grain open saw beans 15 lower, wheat 10 cents, corn down 8. With tariffs in place and not being renegotiated as of yet gave funds an easy choice to resell Fridays rally in my opinion especially in meal where they still carry a net long position. Also 6 to 10 and 8 to 14 day forecasts regarding any prolonged heat domes moving into the Midwest were for the most part absent. Thursday we have a supply/demand report from the USDA showing rises in new crop ending stocks for both corn and beans as the USDA weighs a lack of exports along with an increase in acreage.
There is still time for those who didn’t use the spring rallies for price protection in the form of puts or shorting futures spreads to name a few bearish strategies. While the weather can turn on a dime to hot and dry and/or the Trump administration can strike a trade deal with China that would be bullish for price, one cannot rely on weather or political events alone to turn the fortunes of the grain market. Here are some option pricing suggestions using deferred contracts next year.
Corn: Buy the March 19 380 put for 23 cents. Sell the May 19 corn 460 calls for 10 cents apiece. Pay 3 cents ($150.00) plus commissions and fees. Hedge gameplan: for producers its more than likely that those harvesting corn in the fall will keep some if not all bushels in the bin into year end and beyond,hopefully awaiting higher prices. Being short the May Board at 460 should appeal for some. Long term there’s a bull story for corn but it looks to me if weather doesn’t erupt, the path of least resistance is ultimately lower.
Beans: Buy the Nov 18 840 puts for 22 cents. Sell 2 March 19 1120 calls for 10 cents apiece for a collection of 20 cents. Spread cost 2 cents ($100) plus commissions and fees. Hedge game plan: You are short the board if exercised at 11.20 in late February if you short the March 19 1120 calls to finance near term puts. Some producers may welcome that given where prices are currently. Near term lows in Nov beans last week at 853. A close below 841 in my view could push to 783 on the charts in my opinion. I hate being short options for this duration but in my view there are plenty of futures spreads to buy like the Jan19/Nov19 beans to protect major hedge losses.
Wheat: We have seen a buy the dips mentality as global issues have erupted due to potential declining production. Example Russia is down 20 percent from last years production while the EU is suffering from drought. There have been weather hiccups in Australia as well giving thoughts to the US moving a rung up the ladder for meaningful global export business. I’m a little leery of some of these issues becoming priced in the market and will adhere to the charts for direction and a gameplan. For Chicago wheat basis September, support is at 497.6, a close under and 487.4 and 483.4 is next. a close under 83.4 and its katy bar the door to 445.6. Strong resistance is at 520.2. A close over and 551.4 is next in my view. For KC wheat basis Sep, a close over 508.4 takes the market up to 526. A close over 526 and 533.2 is next. Major support is 487.4 and with a close under next support at 471.4. A close under 71.4 and 445 is next in my view. Option players can consider the following strangle.
Short exposure; Buy 2 of the Dec wheat 460 puts for 5 cents apiece.
Long side: Buy 1 Dec wheat and sell 1 Dec corn against it. This inter-market futures spread settled at 1.58 Dec wheat over. Target is up at last years highs at 1.95 over. Buy on a dip at 1.5o wheat over, and out on a close under 1.39.
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