Grain Spreads
Sean Lusk of Walsh Trading - InsideFutures.com - Fri Jan 12, 5:04PM CST

Two Surprises

There were fireworks with some of the grain spreads following today's USDA report as traders, who bet long on wheat and short on beans were suddenly caught the wrong way after 11 am central time. Sadly there were no surprises in the corn complex as it ended where it began at 347.4 for old crop while new crop Dec finished at 381.4. The outrights traded in a whopping 4.4 cent range. I suppose the only positive for corn was that it gained on wheat. This was due to a slight raise in ending stocks by the USDA, but the real cause in my view for wheat's sizable 14 cent sell-off today was that winter wheat acreage came in about the same as last year at 32.6 million acres. The trade was looking for an average trade guess of 31.3 million acres. Both numbers were therefore bearish: higher acreage vs. expectations and higher ending stocks. the trade did what it should of and quickly dropped 12 cents before recovering, then selling reemerged with March Chicago wheat holding onto key support at 4.21. A move below here next week and the market moves to major trend line support off of 4.13. The question going forward for wheat: Is today's move just a report day sell-off, leaving an opportunity to buy dips? After all plantings of winter wheat are at a new 100 year low. Or do the funds reemerge as willing sellers again and squeeze recent longs down the low 4.00's. Unless weather issues erupt again look for the latter and fund squeeze to take place.

Beans pushed higher as the report wasn't as bearish as previously thought. It was simple as that as ending stocks were raised below the average trade guess at 470 million bushels while yield and production for the 17/18 crop were revised lower. There were bets ahead of the report that had ending stocks pushing up to 500 million bushels. It simply wasn't that bearish of a report which makes it bullish. China this week alone has secured three cargoes of beans for futures shipment. While the totals weren't jaw dropping they have been a more aggressive buyer of US beans at the 950-970 area. When the trade gets back Tuesday, funds will ask two things: Whats going on with weather in South America and where's demand? This will drive price. WX Risk the AG weather site sees Brazil turning hotter and dryer into month end. This could have the almost 100 K managed money shorts in beans covering a percentage of their shorts amid the uncertainty. Please go to walshtrading.com and read our free 25 page weather report for South America. Calendar spreads pushed off the early morning lows as July/Nov beans rallied 3.4 cents. July/Dec meal hardly moved but outright meal gained on oil today.

Chicago/KC wheat vs corn: this spread has rallied over 22 cents for Chicago wheat over corn while KC wheat over corn is up about 30 cents since Mid December. Those still long may want to exit and wait for a clearer picture. Lets put wheat aside for a moment and discuss corn. Corn has 200 K shorts in the market and all the bearish tenets that should drive it lower. (No weather premium, lack of demand). Yet it wont work lower on the charts. This market has been a tight wedge for sometime. Whether a weather premium erupts down in the Southern Hemisphere or demand picks up, this market is overdue for a move here. If beans can work higher it could pull corn with it somewhat and gain on wheat. Spot corn held support yet again today and its my feeling the funds could start to get restless here if we don't start moving lower soon. I therefore look for the wheat/corn spread to tighten up moving forward into month end.

Please join me for a free webinar on both grains and livestock each Thursday at 3pm. Signup is free and a recording link will be sent upon signup. Email or call me at slusk@walshtrading.com or 888 391 7894.

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