Corn: Long Term Play

As of this writing of this post a phase one deal has been agreed upon by China and the Trump Administration. Within the agreement, the President has confirmed that China will buy $50 billion of US AG goods, energies, and manufactured products. The Chinese havent confirmed a number although they did acknowledge they would be buying. However specific tonnages are not confirmed. An official signing still needs to happen. Corn, Soybeans, Wheat, Pork are some of the commodities that have been mentioned for potential future purchase. Food inflation per the Chinese is a real problem as their agencies have cited the higher cost of Pork due to African Swine Flu. In my view this problem isnt going away anytime soon. Continued out breaks of ASF continue and in my opinion this problem will only expand not only through China, but through Asia and into Europe. Due to this and other factors like the unrest in Hong Kong, they needed Phase 1 Deal in my view. We needed a deal as well to ensure for one that China, who is the biggest AG buyer in the World is retained as our largest customer moving forward in the years to come. Below is a detailed outlook of four grain commodities worth considering and a few strategies to consider moving forward.

Corn- Despite the weather issues this past growing season, from late plantings, millions of prevent plant acres, and weather disrupted harvest in the North. Prices remain subdued below the 4.00 threshold for the 2020 futures contracts. The USDA in my view has been over optimistic for harvested acres, yield, and production. It is my belief that their over estimations will be uncovered at some point in 2020. The demand side of the ledger has been the real issue for me and a bigger reason why prices the second half of 2019 havent rebounded. Rallies therefore have been selling opportunities the second half of 2019. That psychology I think is going to change. Due to bumper crop corn harvests in Brazil and Argentina this past season, these countries have garnered and attained more market share for global corn export. For Brazil its twice as much as the year prior. So much so that their largest meat packer JBS bought 200K metric tonnes of Corn from Argentina this week. Its giving thoughts to historic lows for ending stocks of corn in Brazil, or at least for exportable corn moving forward. Should a weather market erupt in SA this growing season especially for their secondary safrinha corn crop grown in February 2020 through June, there would be a legitimate cause for a corn rally in my view. Couple that with final 2019 US production numbers that potentially pull ending stocks down 500 million bushels, we could see a major supply side rally. Remember according to the USDA, there are over 1 billion bushels of corn left in the fields due to the inability to get it harvested because of weather as of Dec 8th. In my view Im devising a strategy to be long, long term as possible. In my view look all the way out to March 2021 corn. Sell the 5.00/4.00 put spread at 80 cents. Collect 4K minus commissions and fees. Use the collection and buy a call spread, perhaps the 450/500 March 2021 call spread for 6 cents. This market more than any other, I suggest a static long longer term. Risk is 26 cents or $1300 per spread. We can adjust strikes and even go further in to 2021 for strategies, but I would start here first.

Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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