Prepared by Phil Tiger

The CRB Index continues choppy and in a trading range with near-term resistance at 242 and greater resistance near 246. Support is evident near 237. The trend is neutral for now but must overcome resistance at 246 in order to turn the trend back up. A break of support at 232 would point to a test of the 1994 lows near 219 and possibly the 1992-1993 lows near 197. Caution is advised.

Grains and oilseeds remain choppy. The quality of the corn and soybean crops has been improving and harvest is beginning. Weather has been positive to final crop development and the beginning of harvest though some colder and wet weather could develop in the period just ahead. Near-term demand for soybeans and/or any harvest delays could exacerbate near-term volatility.

The 1998 corn carry out is estimated by the USDA as of September 12 at 864 million bushels. This could be a positive for corn except that exports have been mediocre compared to last year. There had been some improvement in the 1998 old-crop/new-crop corn spreads but they have slipped back towards the lows of their recent ranges. Carrying charges limit the potential of the back spreads from current levels. The December/May corn spread is still holding between 11 and 15 cents May premium and further gains for the back spread appear limited. Stand aside. The old-crop May/new-crop December 1998 corn spread has slipped from near 20 cents May premium (August 25) to near 4½ cents May premium. Stand aside for now but consider the long May/short December 1998 corn spread at current levels. Note that seasonals would indicate a low for the spread in February-March from a December secondary high. Any major move is not likely to develop after the end of the first quarter of 1998.

Wheat/corn spreads have also been choppy with the December relationship oscillating between $1.03 and $1.30 wheat premium. Hold the two long December wheat/short December corn spreads $1.13¾ cents (June 16) and $1.03 cents (July 14) for an average of $1.08<$E3/8> wheat premium. The stop is nominally at $1.03 wheat (close) premium for both positions and is in jeopardy as of this writing. The objective is a move to $1.55 to $1.80 wheat premium later in the year. There is a strong seasonal favoring December wheat over corn during the second half of the year.

Intradelivery wheat spreads remain weak. The December/May wheat spread has slipped to near 20 cents May premium. While carrying charges will inhibit further gains for the back spreads, the forward spreads appear to have at best, limited potential. The 1998 old-crop May/new-crop July wheat spread is trading near a weak 1-cent premium to July. Stand aside.

Intermarket wheat spreads have been firming–more from weakness in Chicago wheat than strength in the outside markets. Trends are modestly positive for both Minneapolis and Kansas City versus Chicago wheat. The December Minneapolis/Chicago wheat spread has rallied from near 18 cents Minneapolis premium (July and August) to 33 cents Minneapolis. The December Kansas City/Chicago wheat spread has firmed to near 13 cents Kansas City premium from the September 2 low of 4 cents Kansas City premium. Stand aside.

The soybean complex is in a copy trading range. The 1998 carryout estimate (per the September 12 USDA report) is at an adequate 285 million bushels but that number could become smaller if demand continues at a pace ahead of a year ago. Weather remains a focus with the potential El Nino influence on next year's crops as well as some fear of cold and wet weather into the harvest period. However, there are no serious problems at this time. The November forward soybean spreads are barely steady on the potentially slower than normal harvest and tight nearby supplies. Hold the long November/short March soybeans spread from September 15 at nine cents March premium. A nominal five-cent stop is suggested with a November premium of 5 to 15 cents anticipated. The January/July bean spread has slipped to near 21 cents July premium. This is a rather wide discount so early in the life of the spread but does not warrant taking a position. Next year's old-crop July/new-crop November 1998 soybean spread is firm near 24 cents July premium. If the crop continues to develop well and harvest proceeds without difficulty, spreads can be expected to favor the back months into November. The carryout will expand considerably once the current abundant crop is harvested. Stand aside in old- crop/new-crop bean spreads for now.

Crush values are steady with values for October near $1.17, December near 85 cents, and January near 73 cents. Soy oil product values are steady with October through January between 34.5% and 37.5% with the nearer months weakest. Soy oil spreads are steady but little changed. The December/May soy oil spread is holding near 55 points May premium. Stand aside but watch next year's May/December 1998 spread (currently near 10 points December premium) for a potential forward spreading opportunity on weakness.

Soybean meal spreads have weakened. The January/May meal spread rallied to near 900 points January premium on September 5 but has set back to near 550 points January. Stand aside for now but begin watching the March/July meal spread for a potential seasonal back spreading opportunity within the next 90 days (currently near even money).

The January soybean meal/soy oil spread had rallied back to near $7,200 meal premium (contract value) but is now back to support near $5,500 meal premium. Stand aside for now but the long meal/ short soy oil spread will be considered on further weakness.

Meats and meat spreads are mixed. Cattle have been steady, led by the October contract while hogs and bellies have weakened again. The October/December cattle spread generated new highs on September 10 near 45 points December premium and remains near that level. Stand aside. The December/February cattle spread is holding support near 275 points February premium. Hold long December/short February cattle (from 275 points February premium on September 2) with a 50- point nominal stop and the objective at 100 points February premium.

Cattle/hog spreads remain in a choppy trading range. The October cattle/hog spread had a recent high near 10 points hogs premium (September 10)–up from the contract low of 800 points hogs premium (April 24). Stand aside but favor long cattle/short hogs on sharp breaks.

Hog spreads are choppy. The October/December hog spread generated a new high at 435 points October premium on August 1 and is now back near 360 points October premium. Stand aside here as well. Keep an eye on the April/July hog spread (currently near 330 points July premium with a high near 125 points July) for a back-spreading opportunity. This is the most reliable of the hog spreads and can be expected to decline to 500 to 700 points July premium. Be prepared to initiate the back spread on a rally to near 150 points or less July premium.

The February belly/hog spread has slipped to new lows near 60 points hogs premium (September 22). Keep an eye on this one for an opportunity to buy February hogs/sell bellies on as significant rally above 600 points bellies premium for a move back to the lows.

T-bonds have rallied and are testing the contract highs near 116. This has resulted in significant corrections to both the MOB and NOB spreads. The December MOB spread has fallen some 60/32nds since the September 10 high of 194/32nds Muni's premium. Support lies just beneath current levels. Longer term, the December MOB spread is probably headed for the September MOB highs above 7-0 (224/32nds Muni's premium). Aggressive traders should consider initiating a December MOB at current levels. A nominal 16/32nds stop is suggested with the first objective at 176/32nds Muni's premium and higher premiums possible.

The December NOB spread has also broken down to test the lows of July 31 at 181/32nds T-bonds premium. Orders to buy the December 10 year note/sell T-bonds at 175/32nds or more T-bonds premium were filled on September 24. Use a nominal 12/32nds stop with the first objective at 128/32nds T-bonds and smaller T-bond premiums possible.

The December TED spread remains quietly firm with values near recent highs of 79 points T-bills premium. A significant move in the TED spread is not likely without a measurable change in short term interest rates. Long December Eurodollars/short T-bills will be considered on a rally above 80 points T-bills premium. Otherwise, stand aside. Also keep an eye on the December 1997/December 1998 (calendar) Eurodollar spread (currently near 34 points premium the nearby). The forward spread is favored near the recent lows (July 30) of 30 points December 1997 premium. Otherwise, stand aside.

The December S&P 500/Value Line spread has found support near 5,500 points S&P premium after favoring the Value Line for nearly two months. The highs were set on July 24 near 11,800 points S&P premium. The overall trend which had been favoring the S&P is now in favor of the Value Line. The temptation is to buy the December Value Line/sell the December S&P on a rally to levels near 10,000 points S&P premium for a move of 4,000 points in favor of the Value Line. Note that this is a high risk trade.

Currency spreads (crosses) remain choppy. The December Japanese Yen/Deutschemark spread has slipped to 4½ month lows near 2,600 points Japanese Yen premium. This level should be where support is evident. The recent trend has been favoring the Deutschemark but longer term, that is likely to change to be in favor of the Japanese Yen. Keep an eye on this one but stand aside for now.

The December Japanese Yen/Swiss Franc spread has a similar pattern to the yen/Deutschemark spread. Recent (four- month) lows near 1,400 points Japanese Yen premium could extend to the 1,350 Japanese Yen premium level. Longer term, a shift in favor of the yen is expected. Stand aside for now.

The December Swiss Franc/Deutschemark spread has established a trading range bounded by 1,180 and 1,320 points Swiss Franc premium. The Swiss Franc has approximately a 23% premium over the Deutschemark at the upper end of the range and near 19½% premium at the lower end of the range. A Swiss premium above 20% is historically high. Entry into the long Deutschemark/short Swiss Franc December cross is being considered if the current rally can extend to near 1,300 points Swiss premium (currently near 1,250 Swiss premium). Longer term, the Deutschemark should be favored.

Precious metals are barely steady. The December gold/silver ratio has firmed to near 69 again. The ratio is expected to favor gold over the longer term with 80-85 the objective.

The October platinum/gold spread has bounced off the recent lows (near $80 platinum premium) and is firm near $113 platinum premium. Stand aside but begin watching the April relationship (currently near $92 platinum premium).

Copper and copper spreads remain weak. Seasonals point to a low in the October-December period. The December/May copper spread set a new low near 75 points May premium on September 16. Stand aside in the copper spreads for now but keep an eye on the May/December 1998 copper spread for a potential seasonal low within the next 60-90 days and a forward spreading opportunity at a December premium (currently near 100 points May premium).

New York softs are mixed. Coffee remains two sided. The December/May coffee spread has support at 1,800 points December premium and resistance above 2,500 points May premium. The overall trend is still in favor of the nearby with the winter demand period in front of the market. Aggressive traders should consider the long December/short May coffee spread on a break below 1,800 points December premium for a move to 2,800 points or more December premium. A nominal 300-point stop is suggested. The December/March coffee spread is similar but with smaller numbers. Consider long December/short March coffee below 1,250 December premium for a move to 2,200 December premium.

Cocoa and cocoa spreads appear to have bottomed. The December/May cocoa spread has slipped to near $60 May premium while cocoa had set new highs but is now correcting. Stand aside for now but keep an eye on the 1998 cocoa spreads for a potential forward spreading opportunity.

Sugar and sugar spreads remain weak. The fundamental outlook remains negative. The October/March sugar spread is near contract lows near 60 points March premium (September 12) and is about to expire. Stand aside. Begin watching the March/October sugar spread (currently at even money).

The November/January lumber spread is lower as expected and is currently bouncing off contract lows near 800 points January premium. If back spread, take profits at 600 points or more January premium. Otherwise, stand aside. Note that seasonal lows are usually generated by mid-October.

December cotton generated contract lows again on September 8 at 72.30 but is rebounding as this is written due to wet weather in the “open boll” stage of development. The spreads are mixed. The October/December cotton spread broke to a new contract low on September 23 near 150 points December premium in anticipation of first notice day (September 24) for the October contract. Aggressive traders who are long December/short October cotton from an October premium should take profits at these levels and stand aside. Longer term, traders should maintain orders to buy December/sell March cotton on a dip back to near 150 points March premium. The spread is trading between 110 and 130 points March premium. This limited risk (carrying charge) spread has seasonal potential to favor December into the harvest period.

Begin watching the March/July FCOJ spread. This spread tends to favor March during the turn of the new year and especially when July is at a 550 point (or more) premium to March (as it is now). Fundamentals appear to be negative. Nevertheless, the forward spread will be considered on further weakness into the fourth quarter.

The entire energy complex continues within a trading range with only natural gas extending to new contract highs. Crude oil is not far from its lows while heating oil and unleaded gasoline are near the mid-point of their ranges. Nearby petroleum complex spreads remain steady except for crude oil spreads which are weaker with the natural gas spreads continuing to show sustained strength. The long December/short March heating oil spread weakened to new lows near 100 points March premium on September 10th but has bounced back to within 20 points of even money as this is written. Stand aside though some further seasonal strength in favor of December is anticipated with a December premium the objective. The long December heating oil/short unleaded gasoline spread from 150 points heating oil premium (May 15) has rallied more than 190 points off the lows of 179 points unleaded gasoline premium (September 2). The spread will be liquidated on further strength as technical and fundamental considerations are now negative in spite of the seasonal which would favor heating oil in the period just ahead. Raise the stop to 80 points gasoline premium.

Hold long January heating oil/short unleaded gasoline spread from 80 points heating oil premium (August 20). The spread is currently near point-of-entry. Raise the nominal stop to 25 points unleaded gasoline premium. 500 points or more heating oil premium is still the objective.

September 29, 1997Tiger On Spreads

P.O. Box 64401, Chicago, Illinois

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