Commentary: Wheat seems to be the one food grain that could see a near term supply squeeze in the days and weeks to come in my view. Chicago wheat continues to strengthen on corn as it recently dipped below $2.00 vs corn last week but found buyers as corn futures are in free fall due to lost ethanol demand. However, I think that if plant shutdowns of pork and beef processors continue and expand due to Covid 19 concerns in Middle America, we could see increased domestic demand for wheat. If weather plays havoc with the KC crop come late Spring, I think the path of least resistance could be higher. Plantings of Hard Red winter are at a 109-year low. Export quotas have been put in place in Russia and Ukraine as those countries have opened their reserves to feed their people. As the World shutters at home, a heaver starch diet most likely will be consumed. Hot and Dry conditions continue to plague Europe and major wheat growing areas in Russia and the Ukraine. Weather will be the key variable. Plant shutdowns of Pork and Beef should they continue to occur could result in a supply squeeze at home of not only meat but lead into wheat. I think it can get crazier with increased volatility here in the AG space. KC wheat has pushed higher on the year, with the front month July at 5.04. We began 2020 at 4.86. A ten percent rally for the year takes July to 535. A 20% rally pushes futures to 583. It’s a possibility that we could see this type of rally as we enter May. A retest of the 2018 highs near 6.00 would be the target above the 20 percent threshold of 583. There are two ways to play this with different risks and rewards in my view.
Trade Suggestion(s):
Futures Trade: Buy futures near 5.00, just above the upward trendline.
Options Trade: Sell the Sep Kc wheat 7.00/6.00 put spread at 93 cents OB.
Risk/Reward:
Futures: Risk on the futures would be underneath last weeks low at the 471 area. Its been too wild in here with a tight stop in my opinion. Risk is 30 cents plus commissions and fees. Look for a move over last years high at 518. Should we close over that level and you are long futures adjust your stop to 5.00. I’m looking at move to at least 535. A weather rally could push us to the 2018 high at 5.98, but I would look to take profits at 5.83 or the 20 percent level.
Options: One is collecting 93 cents ($4650.00) minus commissions and fees upon entry if filled at 93 cents. The max loss on the spread is $1.00 as the option strikes are a $1.00 apart, plus trade costs, so it is a 7-cent risk. To keep the collection, the underlying futures would need to settle above 7.00 at option expiration. That’s a tall order, but if we have learned anything in commodities, anything can happen and don’t rule out any move. This to me is a classic sell high and buy low trade using option spreads. It can be paired with the futures to give one an aggressive bullish position.
Call me with questions. There are many ways to play the upside with defined risk and lower spread margins. Every Thursday I hold a weekly grain and livestock webinar at 3pm Central. We discuss supply, demand, weather, and the charts. Signup is free and a recording link will be sent to your email. Sign Up Now
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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