Grain Spreads: Bombs Away

Sean LuskGeneral Commentary


Wheat recovered mildly from its 40-cent collapse on Friday. The deal between Russia and Ukraine has been on the rocks since its inception in my opinion and the news over the weekend just added more instability. The bombing of the Odessa port and other aggressive acts put the agreement in question less than 24 hours after its signing and then this morning Ukraine announced it was still pushing forward with grain exports from its Black Sea ports. Zelenskyy declared Russia untrustworthy simultaneously leaving the trade in limbo about how to proceed in my view. USDA reported 475,426 MT (17.5 million bu.) of wheat inspected for export during the week ended July 21, up from 191,333 MT a week earlier and at the high end of trade expectations ranging from 200,000 to 550,000 MT. It is my belief that outside markets offered additional support for wheat with crude oil futures trading higher, and the U.S. Dollar fractionally lower. We also saw both corn, beans, and meal with double digit gains as well to begin the week. While grain storage areas were said to be unharmed, the attack in my view further exacerbated trade concern over months-long disruptions to the global grain trade due to the war. Russia and Ukraine, combined, account for approximately a third of global wheat exports. Trade Idea below using a diagonal option strategy. Given US winter wheat harvest is complete in major production areas, and exports out of Eastern Europe in potential limbo, the path of least resistance maybe higher in the next month or so. 

Trade Idea


Options-Buy the October 22 KC wheat 9.00 call and selling the December 22 Kansas City wheat 10.00 call for a 2 cent debit plus commissions and fees. Symbol here: KEZ22C1000:V22C900[DG]


Options-Unlimited risk here as one is buying an October call option while selling a December call with an expiration approximately 2 months later. This is a volatility play utilizing the buying of near term closer to the money call option, while selling a deferred call option $1.00 higher. Note: As we enter into the trade as a spread, we exit as a spread. I would exit by Labor Day weekend , should we not see the underlying December futures contract trade over $9.00 at that time. One could utilize a GTC stop loss at 8 cents Over, which risks approximately 10 cents upon entry or $500.00 plus commissions and fees. 

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Sean Lusk

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