Grain Spreads: Covering Emerges

Short covering in Corn comes on two fronts so far this week that has resulted in new near term highs for Dec 19 and March 20 corn. First off is weather. The NWS Midday US weather forecast in line with prior forecast runs are predicting that snow accumulation of 15-25 will be widespread across the Dakotas. Regional accumulation upwards of 30-40 is possible in eastern ND. The sheer amount of snow and all within a 4-day time period could cause cause massive logistical issues as well as widespread lodging and quality loss. Cooler temps including frost/freeze in some areas next week could delay row crop harvesting in SD, ND and far western MN until late October. Interior US basis levels are anticipated to stay supported at multi-year highs. Second reason is short covering. Funds shorts totaled approximately 127 K contracts according to CFTC data as of last Friday. That maybe overstated given today's rally, but in my view funds are still over 100 K short. The short covering not only comes on weather threats but also on Thursdays 11 AM central WASDE report given by the USDA. The average estimate for Corn yield is 166.7 bushels per acre. Estimates are from 159 to 169.3. US ending stocks are estimated at 1.682 billion bushels. Range is from (1.257-1.993) and compared to 2.190 billion bushels in the Sept. Report. World ending stocks look to come in near 296.6 million tonnes. Range is (289.9-303.3) and compared to 306.3 last month. March 20/Dec 20 corn (old crop/new crop) has rallied 27 cents in the last six weeks as corn has pushed to new near term highs. If corn holds support levels and/or rallies on bullish supply side data in the days/weeks to come, I think this spread trades from a small carry to an inversion of 11 cents over. That is a fifty percent retracement from the yearly high/low on the March 20/Dec 20 corn spread. The chart below is basic with a few trend lines and Fibonacci levels. If you can buy on a dip at 6 to 7 cents March 20 under, and the market holds, I look for a rally to 11 cents March 20 over. A close under 13.4 March 20 under and I would be out. Risk is 6 to 8 cents depending on entry. I will be discussing the bean and wheat markets in depth on tomorrows post. Will be hosting out weekly grain and livestock webinar this Thursday at 3 pm Central. We discuss supply,demand, weather, and the charts along with speculative and hedge ideas. Sign up is free and a recording link will be sent upon email.

Sean Lusk

Director Commercial Hedging Division

Walsh Trading

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