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Commentary
If you have been watching the action in wheat lately, you might have found a cure for insomnia. Boring, choppy and rangebound. From 5.40 to 5.30 is where buyers have emerged, and selling has dried up. A move over 5.60 has come with a lack of conviction where managed money re-enters and adds to their net short. However, US wheat values got a boost from Russian markets as Russian FOB values increased by 5 dollars per metric ton today. Egypt was also noted as sniffing around for non-Russian origin wheat too. Longer term weather charts show the potential for a dry spring that may cut into US winter wheat production as that crop would have to climb over a potential soil moisture deficit as it emerged from dormancy. There is a lot of winter and spring left before the US yield is realized and confidence in long term forecasts is not very accurate to put it mildly. That said, should forecasts verify drought down the road, I think the 90k shorts would look to cover. Managed money is net long 325K in corn and short 94K Chicago wheat and approximately 30K in KC, plus another 20K short in Minneapolis. I attached wheat versus corn using the July 25 contracts. July 25 wheat was $2.50 over July corn last Summer but that has been whittled down to just 66 cents over this week as funds have flipped long corn but stayed short wheat going back to last Autumn. If a little weather premium can stick around in the Southern plains or re-emerge in Eastern Europe while we get closer to grain harvests in South America, I think there is an opportunity here to buy wheat and sell corn. I don’t see the funds holding this type of disparity, long 300k corn/short 90k wheat much longer in my opinion.
Trade Ideas
Futures-N/A
Options-Buy the July wheat vs corn spread at 70 cents OB, with an objective to 1.38 for a gain of 68 cents minus commissions and fees.
Risk/Reward
Futures-N/A
Options-I would risk no more than 10 cents here plus trade costs and fees. This trade can turn into a widow maker quickly. Place a GTC stop loss at 60 cents July wheat over Corn. If you enter in at 70 and the spread moves in your favor to the high of year near 85 cents, I suggest trailing the stop to 70 cents so that the worst-case scenario is near breakeven.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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