Grain Spreads
Sean Lusk of Walsh Trading - - Mon Apr 16, 4:40PM CDT

Soy Complex

We have started to see a little deterioration in soy meal which has spilled into the bean complex. May meal broke some minor support at 380.0 and looks like it could pullback down to the 369-370 level. This weekends crazy weather in the upper plains and northern great lakes is the first of three systems that bring cold and rainy conditions to these areas through the first week of May. This gives thoughts that potential spring wheat and corn acres could switch to beans. Managed funds long 175 K contracts of beans and over 100 K in meal may look to pare positions as a result. Weather and its unpredictability will remain the key for the planting window but I would imagine some longs in beans might get antsy in here due to the colder and wetter pattern should it continue deep into May amid any crop switches. Also of note, despite Argentina's bean and corn crops that continue to get downgraded, we are at the point where its become more a known. While the bean crop gets pushed to 37-38 million metric tons from 40 million previously, Brazil's final bean crop could push to 115-116 from last months estimate of 113 million metric tons to make up some of the shortfall. The flip side is that Argentina bought beans last week from the US for the first time in twenty years, a bullish export surprise. We have also witnessed China in buying since the potential tariff noise a few weeks prior supporting the market into last week. In my view exports like last week's record export sales for early April would need to reemerge week in and week out to support price or we could see selling come along with fund liquidation. It would not be uncommon to see funds liquidate here to only re buy the market once we get closer to early soybean growing season uncertainty.Funds traditionally will clear out the their longs prior to U.S. growing season uncertainty unless we see either one of their by-products maintain a sizable bid in the market.
If looking to get some downside exposure in the near term look at these two trades.
Buy the July 1020 soybean put and sell 2 July 1160 calls for three cents plus commissions and fees.
Or something you can build longer term: Sell the Nov 18/19 bean spread at 46-48 cents Nov 18 over with a stop at 57 cents.
Objective to 25 cents over, then to parity.
Watch meal here in the near term with the July contract going top step after Friday's close.


July KC wheat broke through key support at 508.6 to settle today at 497.0, down 17 cents on the day. Needed rains look like they will show into months end reversing some bullish weather sentiment late last week. KC wheat has fallen apart vs corn and the Chicago wheat contract while Minneapolis gains on KC amid spring wheat planting uncertainty. Here's the deal with KC as I see it. If the winter wheat is of low quality meaning low in protein, it will not garner much if any global demand on the world market. Therefore a case can be made that you can grow less of it with the result being lower prices. No demand for something results in lower prices. Because of that despite lower production, the squeeze in ending stocks might not be felt for some time but could result in a short squeeze late in then year. But not now in my view. I look for KC and Chicago to lose to corn here until crop tour results come out at month end and into May.
Use July KC as your trigger, we close over 508.6 this week stay or get long. Condition ratings rose by a whopping 1 percent this week for the good to excellent condition from 30 to 31 percent good to excellent. While that's still awful, it could give thoughts to funds who were long 33K contracts of KC as of April 10th, that the worst is behind us. Stay tuned and trade the charts. One spread I would consider is July KC vs corn. It just broke over 36 cents in the last 6 sessions and could target major support at 92 cents Kc over. If looking to sell, sell Kc over corn at 1.08-09 Kc over. Get out of the spread if July Kc settles over 508.6. I Look for the spread to work lower down to 92-93 over. While I'm not crazy about corn, I think it continues to tighten vs wheat. If looking to buy corn and not fool with wheat, buy July futures at 386-88.

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