Grains Commentary

Daily Grain Report

 

I am going to present the wire in a little different slant today, as I mentioned last week we are going to try some new approaches of doing things as we head into the New Year and since markets are as slow as they are I thought we would try a few new things.

 

The CN13-CZ13 spread is currently trading at +$1.07 with a high of nearly +$1.60 last August, there are many things that we know now that wasn’t known back then and obviously there are still unknowns ahead.

 

We have learned over the years that inverse on spreads are there to do 2 jobs, 1) to pull out every kernel of grain out of farmers hands into the market and 2) to push the consumer to reduce current consumption and attempt to move it out forward. It’s difficult to know when the tide turns on these but in recent years when they turn it can be fast and furious.

 

The current corn basis is at or near record high levels, but yet export demand is still bleak, the market keeps hoping for US exports to increase as SA availability shrinks, but yet what NO-ONE wants to discuss is that with each passing day SA is 1 day closer to new crop availability and will once again return with a vengeance to the export markets. We also point out that there is still corn coming out of parts of E-Bloc countries.

 

The US elevators are filled to the brim in many locations with corn which a good percentage of this grain is still unsold, without a massive weather problem in the next 4-6 weeks in SA the corn spreads could be the best sale starting off 2013. The CN12-CZ12 was similar to the current spread as it was thought to be the one that goes to $2+ but yet finished at a feeble +15. The current USDA C/O is hovering in the 650m bushel range, extremely tight, but it seems that over the years the markets have done a very good job of dealing with tight supplies from a global supply chain rather than just focusing on the US balance sheet.

 

Acreage for new crop corn will be massive we all know this as further projections are 97 million acres for corn, this will indeed put a lid on any rally for CZ13 for the time being, but if CZ breaks then does some of these acres move to something else, that’s why CZ13 will struggle to break significantly between now and May of 2013.

 

So what does one do to capture something like this, look to buy the CN 7 puts for 32 cents and at the same time sell the CZ13 6-5 put spread for a 30 cent credit. Play this out on expiration day and having the CN13-CZ13 trading at +15 and placing CZ13 at $5.50 which places CN13 at $5.65 the CZ13 put spread will have a value of 51 cents and the CN 7 puts will have a value of $1.35 for a profit of 82 cents.

 

There are many other plays to look, this is just one, we welcome your feedback regarding these new ideas.

 

Editor’s Note: Daily Grain Commentary readers who are equity investors/traders only can gain access to the grain markets through the following exchange traded funds (ETFs).


Grain Markets/Indexes

ELEMENTS MLCX Grains Index Total Return ETNN (GRU, quote)

iPath Dow Jones-UBS Grains Total Return Sub-Index ETN (JJG, quote)

Power Shares DB Agriculture Trust (DBA, quote)

Corn

Teucrium Corn Fund (CORN, quote)

Wheat

Teucrium Wheat (WEAT, quote)

 

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