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Commentary
Tariffs, tariffs, and more tariffs are hitting wheat hard in recent sessions. The short covering inspired rallies of late January and half of February have come and gone. Managed funds covered some positions and when lack of demand coupled with a reduced lack of a weather premium, and most importantly massive trade uncertainty, funds became yet again aggressive sellers again above the 6.00 level in all classes. Simply rinse and repeat by funds over the last few years in wheat. All is not lost though, and this recent price break may yet unveil, a new buying opportunity in my view, trading idea below. Chicago, KC, and Minneapolis all put in new contract lows today as the aforementioned fund selling hit the market hard following the lower move in both the corn and soybean markets, Chicago or soft red winter is the cheapest origin wheat in the world into the close. China unveiled retaliatory tariffs of 15% on US wheat, corn, cotton and chicken with 10% tariffs on soybeans, milo, pork, beef, fruit, dairy and fish products, Canada and Mexico also to announce new measures in response to the new US tariffs, China has been a light importer of wheat the last 6 months and a sporadic player in the US market in the past. China has made it public that it plans on moving away from grain imports, especially wheat and corn. China has 0 unshipped wheat bought from the US. It’s important to note in my view that in regard to China, that again wheat and corn are absent for sale while soybeans are most likely coming to the end of their export window. For AG then the impact is minimal in my view but that obviously changes until both sides play either “Let’s Make a Deal”, or this trade war lasts deep into 2025. For Canada, the US is 30% of Canadian trade and the US runs a significant trade deficit so there is a real risk for the Canadian economy, this may impact wheat with the US importing 130 mb of Canadian wheat with 70 mb of springs and 45 mb of durum per the USDA. Crop conditions after the close yesterday, showed the following. Colorado came in at 10% better at 67% good/excellent (G/E), followed by Kansas rising 4% to sit at 54% G/E. Other hard red winter states saw declines, with South Dakota down a sharp 9% month-on-month to only 16% G/E, Montana down 4% to 67% G/E, and Nebraska down 2% to 23% G/E. The soft red states, both Illinois (-9%) and Missouri (-6%) saw declines to now sit at 56% G/E and 69% G/E, respectively. Oklahoma and Texas are now reporting weekly due to their crop being further along in the season, with Texas seeing a 1% week-on-week improvement to 35% G/E and Oklahoma seeing a 3% week-on-week decline to 34% G/E. Trade idea and weekly KC chart below.
Trade Idea
Futures-N/A
Options-Buy the Sep KC wheat 7.00/8.00 call spread for eight cents or $400 per spread plus trade costs and fees.
Risk/Reward
Futures-
Options-If filled at 8 cents, offer the spread at 30 cents to exit minus trade costs and fees. Risk no more than 5 cents from entry plus trade costs and fees.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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