Grain Spreads: New Crop Ending Stocks

New crop corn and soybean ending stocks were the biggest surprises in today's report in my view. New crop ending stocks for corn came in at 1.577 billion bushels which is the tightest in five years. The USDA has stated that its using a baseline trend line yield coming in at 174 BPA with its export estimate at 2,100 million bushels. Weather events globally regarding lower potential South American and Black Sea production could have the USDA revise exports higher. But make no mistake, it will be US weather that will be the determining factor for corn in the next 10 weeks or so. Adverse weather in the form of a lasting heat dome could push production below the USDA estimate and lower ending stocks to the 1.2 or 1.3 billion bushel level. This would be the lowest in years with stocks/usage falling appreciably. Those holding long positions in corn and caught on this break were given a reprieve with today's numbers. A 50 percent retracement rally of this recent break would push July futures to 390.0 while new crop Dec would push to 4.09. I wouldn't be surprised for a move higher to these targets and then a pause heading into the month end acreage report. Weather has been optimal to this point with the good to excellent condition for corn at 77 percent, eight points above the 10 year average. Corn bulls in my view will need an abrupt change in longer term forecasts to hot and dry in my view to retest the highs for new crop contracts in the month of July.

Beans like corn had their new crop ending stocks reduced by increased usage amid strong crush and export demand. New crop ending stocks were lowered by 30 million bushels to 385 million. Like corn, adverse weather in late July and August could reduce this lower in subsequent reports. However beans finished the day unchanged amid two rallies , one in the overnight and one after the 11 am report with bean contracts being sold into. The average trade guess for new crop ending stocks came in at 417 million bushels while the lowest guess heading into the report was 395. It was bullish vs expectations yet the market didn't rally. Markets that do not rally on bullish news leads me to believe that the market could work lower in the near term unless something else enters changing this recent bearish two week trend. That something could be an influx of demand. If the US and China can allay fears of a trade war absent of beans being caught in the cross-hairs, it may signal to funds that its time to buy as any weather hiccups would mean lower ending stocks. Until then I look for spot beans to back and fill all the way down to the yearly lows at 940-945. Unless we see a bounce in meal, look for beans to press here with old crop leading the way down.

Unlike corn and beans, wheat didn't see a dramatic change in old or new crop carry with world numbers revised higher. Yet it had the days best performance with Chicago and KC higher by 18 to 20 cents. Why the rally? In my view domestic basis levels have gone inverted in some areas stricken by drought in the western wheat belt while lower crop sizes out of Russia, the EU, and Australia to name a few have kept the Chicago contract bid and bought on rallies. Listen; there's no doubt there are production issues with the hard red winter, but they are also a known. As harvest activity will ramp up in number one wheat producer Kansas into month end, the reports out of there will in my view take July KC to new highs or recent longs will liquidate long positions and the market will challenge the 490-500 level quickly. Consider these two option plays going forward to position on both sides of the market.

Short term exposure for bullish pop to the upside.

Buy the August 6.00 Kc call for 15.4

Sell the August 6.60 Kc call for 6.2

Sell the August 6.80 KC call for 4.4

Spread cost 4.6 cents, $237.50 per spread plus commissions and fees. Risk on this trade is above 7.40 at expiration in late July.

Long term bearish

Buy 1 Dec 18 540 Put for 18 cents while selling 2 Dec KC 750 calls for 8.6 cents apiece.

Spread cost a half penny or $25.00 plus commissions and fees.

This strategy makes the most sense for a wheat producer in my view as the risk in both scenarios, both near and long term sit at 7.40 basis August futures or 7.50 December.

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