Grain Spreads: Stem the Tide

Corn and Beans finally saw some decent short covering this week buoyed by lower than expected good to excellent conditions on Mondays crop progress report, while wheat is aided by lower than expected global production in Europe, the Black Sea, and South America in my view. With tariffs still a bearish backdrop, its too early to determine where this bean crop is or isn't in the field. We will get our first official glimpse on August 10th, with the USDA's first surveyed report. That is still three weeks away. Corn especially new crop contracts found buying interest off of 3.50 Dec, and 3.62 March 19. Once prices reached those levels last week, the 3 percent drop in good to excellent condition gave bears pause while bottom feeding buying from some end users stepped in to bid up prices. Meaningful resistance is between 375-378 in Dec Corn, so if you have been long and wrong on this break in corn over the last month, I suggest you consider the following trade.

Buy the March 19 370 put for 16 cents. For every put bought, sell 2 March 430 calls for 8.4 cents collecting 17 cents. The 1 x 2 ratio would collect 1 cent per spread. While there are trouble spots in the growing areas of the Midwest, the major producers from Nebraska on east to Ohio show impressive condition ratings. Should those high ratings continue, we could retest the recent lows and may even extend lower in my view. If something else enters into the market that pushes corn higher, you simply get out or buy some Dec corn 4.00 calls for 8 cents OB. Support and Resistance into next week comes in as follows for December corn. Support 363. A close below and its 354.2. A close below there and its 348.2. Resistance is 378.2 and then 383.4. A close over 383.4 in my view drives this market to 399.2 possibly.

Potential trade war escalations like the one President Trump issued today potentially threatening China with an additional $500 billion worth of tariffs didn't rock the soy complex like past announcements. However with potential demand from China being evaporated in the near term, its hard to get excited for a big move higher as the trade could be bracing for the largest ending stocks figure ever. We will see as I suspect that future sales could be diverted or switched to China through South America or Asian neighbors down the road. Nov beans has resistance at 867.2. A close over and the market could push to 894.2 then 918.6. Support is down at 8.56, then 838. If these don't hold, the near term low at 826 better or I think the market could push 20 percent down for the year to the 760 handle. If you hear anyone explain how this tariff deal with China plays out, please ask them for next week's winning lottery numbers when you get the answer. I think the best way forward is to strangle the bean market.

Buy the Oct Bean 8.00 put for 7 cents OB.

Buy the May 19 10.00 call and sell the May 19 11.00 call for 10 cents.

The risk here is the price paid for the spreads plus commissions and fees. Near term bearish and long term bullish. It may not be best way but I strongly feel that the bean market isn't going to kick around 8.50-8.65 for long. Volatility will return soon in my view and therefore a bigger move in price.

Wheat has really held in there when it seemed a move down to the March lows was inevitable for both KC and Chicago contracts. Whether it a post harvest rally or the realization that Russia's crop is down almost 30 percent year on year which pushes their offers higher, the market psychology has turned to a buy the dips mentality. Lets stay with the Chicago contract. Sep futures traded up to a major trend line at 5.18 today and settled just below it. A hard close over it and we can push to 5.38 and possibly 550.6. If we close over here, 518, look to buy wheat outright or buy it vs corn at 1.64 wheat over using December contracts on the spread. This spread pushed to 1.95 over last year and would be a target to sell if long the spread. If we fail again at 5.18 Sep wheat, look to buy 1 Oct wheat 490 put for 8 cents in my opinion.

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