Grain Spreads:Calm Before the Storm?

It was a relatively quiet Monday as position squaring ahead of tomorrows WASDE 11am release prompted a choppy range bound session in the grains.The average trade estimate for the US 2018/19 corn stocks is 2,013 Mil Bu, soybeans 913 Mil Bu and wheat at 1,076 Mil Bu. The report is not expected to be bullish if we come in near expectations ,as the US/world holds an abundance of supply. Yet, it will be the reaction of the market (with funds holding a sizable net short and farmers not selling) that could be the most important following the report.

History lesson: Cash corn/soybean basis levels are firming throughout the W and N Midwest ahead of a late winter storm that promises to drop 8-24 of snow. The snow will close roads and cause a cold 6-10 day outlook as it melts. A year ago, Midwest states endured one of the coldest April's on record and farmers were able to get back in their fields during the 1st half of May. US corn yields held up very well following a May that was record warm. The point is that the trade/managed funds don't seem willing to build in to much weather premium for Midwest snows/rain until its assured that planting woes will likely continue through the first half of May. Having said that we haven't seen flooding to this extent in major growing areas of the Midwest unlike last year that could significantly reduce corn planting.

Follow the Charts! For May corn, 3.57 needs to hold or else its 3.49 and potentially 3.38. Resistance is 3.66 and then 373.6. After the month end stocks in all positions report major surprise, I would be betting both ways going forward. Buy the June 360 put/380 call strangle for 8 cents OB. For Soybeans, support sits at 8.96. Under that its 885 and then 873. Resistance is 912.4 and then 916. A close over 916 and its 935. Report day volatility play, buy the May bean 910 call and 890 put strangle for 7 cents. Wheat is a different animal, where the new crop calendar year begins June 1. Chicago wheat is trading 31 cents over KC in May/May, while July/July sits at 29 cents KC under. Its abnormal to me in the historical sense but its telling us that KC is plentiful while the damage is in the soft red (Chicago Contract) during growing season. However, wheat is grown on quality not quantity and I look for a turn in this spread down the road, where the higher protein KC tightens vs Chicago. With this premise in mind , buy the June KC 470 call at 5 cents, or buy the July KC/and sell the July Chicago at 31 cents under with a stop under 37, risking 6 cents.

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