Grain Spreads

Sean LuskGeneral Commentary

Corn/Wheat

It was breakout central in the wheat market this week as Chicago and KC outright contracts have led the way higher. We have been beating the drum since late December encouraging those to consider selling Minneapolis wheat vs buying either Chicago or KC against. Minn/Chicago traded up to our sale target at 1.95-97 Minneapolis over, but as we suggested has tightened  past our target of 1.60 to close today at 158.6 Minneapolis over. Next target sits at 1.45 Minn over. KC wheat has been the big mover this week as drought like conditions in the western wheat belt, particularly in # 1 wheat producer Kansas,  followed by Oklahoma, and Texas have all seen winter wheat ratings  at multi-year lows per good to excellent conditions. Persistent dry weather has plagued these areas and has ignited a bid in KC Wheat. March KC has rallied 52 cents since mid January and has gained on Chicago wheat and corn in the process. KC wheat vs corn has pushed out to 1.10 over corn from just 73.4 cents over as of January 23rd. Much of the rally came this week after the state by state winter wheat ratings release Monday. KC wheat over Chicago wheat has rallied 15 cents from parity in just 4 trading sessions. Upside target on the KC wheat vs corn spread come in at last summers highs at 1.46 over, basis March 18 futures. Out right KC wheat has an upside target at 4.79 basis March. If that is surpassed look for the market to test the fifty percent retracement at 4.94  which measures last summers high to the recent low. A close over and major trend line resistance is at 5.30. These weather rallies can be very rewarding and when unwound can lead to disaster. Trust me I’ve experienced both. For clues, lets focus on KC wheat basis March. A close below 454.6 through next week negates the rally in my view and would  be a cue for me to buy either corn vs KC wheat or buy Chicago wheat and sell KC. However a close over 479, would most likely lead to KC wheat to rally against corn and Chicago wheat. Call me with specific levels. Last week for those who took advantage, we suggested buying both corn and wheat calls while selling puts to finance.

Corn: Corns push higher from mid month comes on two fronts with the first being short covering. Funds pushed out to a short position in the amount of 226 K contracts just shy of a record bearish position. Yet the market couldn’t take out meaningful support. Second, drought like conditions in Argentina has led beans higher and corn has followed as tail of the dog, putting on 15 cents from the Jan 12th low. We have seen demand pick up from flash sale announcements as weakness in the greenback makes US corn more competitive in the near term. Upside targets in March come in at 366, and with a close over 3.78 as the next levels to the upside. A close under 357, brings us back t 3.53 then 3.48. There’s a long-term bullish story for corn but it hasn’t erupted yet. Those looking for a conservative trade may consider buying the Dec 18/ Dec19 corn spread anywhere between a 20 to 18 cent carry. Risk a stop under 26 cents. Targets are parity and then 10 cents Dec 18 over Dec 19. Any three to five cent pull backs in the July contract and one should consider the following options trade. Buy the 380 July call and sell the 360 put. We have been long this 1 x 1 ratio since even money and its pushed out to 8 to 9 cents over this week. Look to buy dips at 3 to 4 cents over should we get them with a tight stop at 4 cents under. Theres so much to cover here with these spreads and I’m constantly scouring over the board examining opportunities. We offer free technical and fundamental analysis, so please reach out if you want a professional opinion on a spread relationship in futures or options.

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