Relative (spread) trades can work if one commodity moves in the proper direction big time and the other does not move at all. Both underlying commodities move in the correct direction small but consider this two separate trades. And the misconception that spread trades are less risky than an outright trade is flawed in my eyes. So for this transaction we are spreading two agriculture commodities and being we are in key planting and development stages in US crops expect volatility. The ag market has already priced in planting delays but the fact that soybeans can go in the ground later than corn for ideal yields means corn has given up acreage to soybeans. It is too early to tell how significant that will be. Another wild card is what weather will bring in the coming weeks as Mother Nature has not been cooperative.
Not to complicate the issue but this is not a 1:1 trade. My suggestion is for every 5,000 bushel sale in soybeans you purchase 10,000 bushels in corn.
2:1 Corn/Soybean Ratio Spread:
The chart above shows the movement in this spread for the last five weeks. Since early May the corn/soybean ratio spread has moved $1.10 or (110*$50=$5,500). It appears to be bottoming out and while I am not smart enough to know if soybeans will decline, corn will hold its own or corn prices will appreciate more. To get to the finish line I do think it feasible to see the spread trade back near -$1.50. That represents a move of 60 cents or $3,000 and if the spreads widens greater than the recent support take your loss ... approximately 15 cents or $750.
November 13' Soybeans:
As of this week soybeans have completed a 61.8% Fibonacci retracement (upper white jagged line) gaining better than $1.30/buhsel off the lows established 4/24. Futures have danced just above the 9 day MA (green line) and I think a penetration of that level would be confirmation of an interim top is in place. Even on a pullback to the 38.2% Fib level that is 55 cents and I would not rule out a test of the 20 day MA (light blue line) which puts November futures back at $12.60.
The same wet weather that has impacted corn planting will play a role in soybeans but the window is open a bit more. While there is still time to plant soybeans domestically, the forecast looks moist for another couple of weeks. The calendar would be late June and anything planted after that will likely struggle to hit anywhere near full yield potential.
It is not that I am extremely bearish. Soybeans I feel the market has priced in too much too soon and while prices may remain at lofty levels on minor profit taking it could allow corn to catch up.
December 13' Corn:
Corn has backed off 30 cents off recent highs but held support at the 20 day MA (light blue line) yesterday. As of this post futures are higher by 1.8% trading just above their 9 day MA (green line).
Unfavorable weather could hinder the healthy development of this year's corn crop, resulting in a smaller harvest this fall than originally expected. A cold, wet spring delayed planting of corn crops in much of the Midwest. Concerns are now turning to unfavorable conditions in some areas for crops that have already been planted.
We're hearing reports from the Midwest that corn which has been planted is pretty rough looking ... something has to give. The fact that we've only tested the 38.2% Fibonacci level (lower white jagged line) I think there is plenty more upside in the months to come. A 50% Fibonacci retracement lifts corn 30 cents from current trade while a 61.8% retracement puts December corn 45 cents/bushel higher. On this particular transaction I'm advising 2:1, so multiply the move in futures times two when figuring profit/loss.
In review I'm advising to buy (2) December corn futures and selling (1) November soybean futures. The first chart is the spread chart. Every penny move represents a gain/loss of $50/spread.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.