Grain Spreads: Mid-Summer Gameplan

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Mid-Summer Game Plan   

Soymeal

I believe in meal long term due to 30-year lower harvests in the US Hard Red Winter Wheat belt and potentially EU due to heat and drought.  The thinking is less wheat moving into feed rations, where meal is a cheaper alternative. I'm not looking for miracles here, just an eventual move in May 2027 meal from 310 to 350/360. Should weather throw a wrench in either US or South American bean production due to EL Nino, we could see deferred beans and meal rally significantly, since China at least verbally is scheduled to buy 25 MMT of 26/27 US production. Pay attention to what they do and not what they say.

Suggested Course of Action- 10 spreads

Margin $263.00

Sell the May 2027, 410/360, put spreads for 46.00 points or a $4600 collection less trade costs and fees.

Risk is $400 per spread plus commissions and fees.

Objective should futures move from 315/320 to 350/360, is to cover the spread @ 25.00

10 spreads at a $2100.00 collection=21k less commissions and fees.

Live Cattle

Scarcity is still Scarcity. The domestic cattle herds are still at historic lows.

Sell the February Live Cattle 260/240 put spread for 1750 points or a $7000 collection, less trade costs and fees.

Suggested Entry is 5 spreads. Risk 200 points or $800 per spread, for a maximum risk of 4k plus commissions and fees.  Look to buy back at 400 points for a 1300-point gain or $5200 per spread less trade costs and fees.

Margin per Spread is $1108.00 

Natural Gas

Gas has been stuck in the mud since winter with no direction. No one wants to sell it below 3.00, nor buy above 3.50.  Demand is at a record, but so are supplies domestically. Foreign gas markets are much higher. Currently the spreads show, no reason for Henry Hub to tighten near term vs Euro and Middle East markets. Supply over demand for Nat Gas domestically has supply running over demand by 30% according to Nat Gas execs. These same execs see the spread tightening to near parity in 2027.  This market has an exportable demand story. That has been baked into the market and absorbed. The reason why it would rally further on demand is domestic. Data centers, pipelines, and Crypto data mining all require enormous amounts of power that the grid can't handle. Which begs the question, what power source do we have domestically that's cheap enough to power all of it?  Nat Gas. That's why many execs see the supply/demand spread moving to parity.

Suggested Entry-10 spreads

Buy the June 2027 5.00/6.00 call spreads for $200.00 per. 

Looking for a 10/1 return to sell the call spreads at $2000 per for a gain of 20K, less trade costs and fees. 

Crude Oil

We want to be long the next dip in crude prices if the market retreats back to the $70 barrel area. We still think the ramifications and lack of damage assessments for both Russia and the Middle East will amount to lower production. China in the near term has gone silent and has dramatically reduced their imports. While gas prices will go back up for a while, the war will end in the next couple of months before the midterms, and oil prices will rapidly decline again. Gas prices excluding CA, will decline back below $3.50 by November. Rule of thumb for oil traders-when prices of WTI are over $100 we have a real problem, when under $100 we have just sufficient amount, when under $90, we have enough, when under $80 more than enough, and under $70, too much. Keep in mind when they talk about barrels days’ supply, they do not count the millions of barrels on the water and in pipelines, but only what is measured in tanks.  The world is making work arounds that will be permanent, and some of that is much more US exports.  Some is the pipelines being built now across the desert in UAE and Saudi Arabia. We are not having an oil crisis now. Also, millions of barrels on tankers got out recently and is on the water. It is true the US SPR is badly in need of repair and is too low now, so it needs to be refilled at some point. China cuts back a lot when prices are higher, so that is another major factor in determining if there is an oil shortage.

Buy the June 2027, 100/110, call spread for 35 points or $350.00 per spread plus commissions and fees.

Objective is to sell the 100/110 call spreads for $2500 per less trade costs and fees.

5 spreads are suggested. I could see crude retesting high 80s /low 90s per barrel by year end.

Risk 25 points or $250 per spread plus trader costs and fees from entry on a stop.

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 Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

312 957 8103

888 391 7894 toll free

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slusk@walshtrading.com

www.walshtrading.com

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