Commentary: Chicago Wheat vs Corn has pushed out to well over $2.00 making a near term high of $2.30 just a few days ago. Today the July/Chicago wheat settled at 2.14 over July corn ZCN. Tight ending stocks for wheat amid a less than certain outcome for the winter wheat crop is a big reason in my view. Corn on the other hand has ample ending stocks and they could swell further given the demand destruction in the ethanol sector. Its therefore hard to fathom that corn will tighten vs wheat in the weeks to come. However just when you think that something can’t happen in commodities, it usually does in my opinion. Who in the world predicted spot crude to 19 dollars in mid-January as an example Take a look at the chart. If one could sell this spread at 2.20 wheat over along with holding the near- term highs on this spread at 2.30, we could see a correction into the gap at 1.88 over. This spread would tighten on two fronts in my view. First reason are the uncertainties of the corn crop going into the ground amid plantings delays and adverse weather versus a potentially known Chicago wheat crop entering into harvest, where the trade has a good grasp on yield and production. The known versus the unknown. Second reason in my view is the overbought price disparity between the two contracts. $2.00 wheat over here could perhaps be viewed as a little extreme as we enter into May.
Trade Suggestion(s):
Futures Trade: Sell the July wheat (ZWN20) and buy the July Corn (ZCN20) above the market at 2.20 wheat over on a GTC order.
Options Trade: N/A
Risk/Reward:
Futures: The risk here in my view is to exit on a close over 2.31, risking approximately 11 cents upon entry, or one could place a GTC stop loss at 2.31. My initial target for an exit is the bottom of edge of the gap at 1.88 wheat over. If this support level can’t hold, I think we could trade all the way down to 1.50. If trading multiples place buys/exits at 1.88 and at 1.50. This second level represents a 50 percent retracement from last years low to this year’s high.
Options: N/A
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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