Commentary:
I’m seeing some possibilities within the wheat sector for consideration. The ideas come on two future possibilities for consideration. First soft red winter wheat ratings released this afternoon show very good condition in the soft red winter states. Good to excellent condition ratings come in as follows per the USDA. Illinois at 62 percent, Indiana 67, Michigan 55, and Ohio at 72. Remember soft red winter ending stocks (Chicago Wheat) sit at a 7 year low at just over 100 million bushels. In my opinion it’s the reason why Chicago has held a significant premium over the higher protein hard red winter KC wheat, and the Spring Minneapolis contract. In my view, should we see elevated ratings through Spring, ending stocks could surge higher and be seen as ample by funds, therefore potentially losing premium versus the KC and Minneapolis contracts. These state by state ratings released every Monday are very subjective and can significantly be altered in a NY minute. While its been wet in the Eastern Grain Belt, its no where near what occurred last Spring with fields flooded out for weeks on end that resulted in a very poor conditioned wheat crop amid less bushels. That type of precipitation can still emerge but as of this post may not appear to the extent of damage that occurred in 2019.
Spring wheat plantings could be a concern in the North given the amount of moisture received in Minnesota and the Dakotas, especially North of I94 since late last Fall/Early Winter. Thousands of bushels of corn that couldn’t be harvested late last year will potentially come out this Spring. Planting estimates are lower per the USDA’s March 31st report for the Hard Red Spring and Durum varieties. There will likely be further revisions in plantings in future Government reports, but like any other grain its not what you plant, but what you grow in my view. Uncertainty over the amount of sowings then early condition are all major unknowns now. Given that Chicago wheat is trading at a 13 cent premium to Minneapolis at this point. I’m looking at the July Minneapolis/July Chicago inter-market wheat spread. This spread traded close to 90 cents over Minneapolis last Fall. Currently trading at 13 cents Minneapolis under. I’m not trying to catch a falling knife here, but should 17 to 18 cents Minny under hold here on the mini trendline from the near term lows at 22 under, I would look to be a buyer. This hinges on the Chicago or soft red good to excellent ratings sustainability deep into Spring.
Trade Suggestion(s):
Futures Trade: Buy the July Minneapolis wheat and sell the Chicago Wheat at 18 cents Minneapolis under.
Options Trade: N/A
Risk/Reward: If filled at negative 18 cents on this spread. Place a tight stop loss at 23 cents Minneapolis under. The risk is 5 cents plus commissions and fees. My target for exit would be the 50 percent retracement level for this spread from last Septembers high to this months low at 33 cents Minneapolis over. This target would collect 51 cents minus commissions and fees.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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