Commentary
Grain bulls controlled the overnight trade in the grain and soy complex amid global supply concerns as Russia’s invasion of Ukraine is showing no signs of letting up or ending anytime soon in my opinion. Russia’s war in Ukraine has sparked a fresh wave of hoarding in parts of Europe with panic buying surfacing caused in part by shortages of various food and other products in world markets. This month, global wheat prices spiked at more than 80% higher than a year ago. Sunflower oil 80% of it produced by Ukraine and Russia is rapidly becoming unavailable, pushing up the cost of alternatives. Soft Red winter wheat touched the 85-cent daily trading limit higher at times today, with Kansas City close behind. Minneapolis traded just below limit higher levels at times late this morning. Some wheat is getting out of Russia – perhaps as much as 2.2 million metric tons this month – but supplies coming out of Ukraine are largely shut down in my view. It is my belief that another week of destruction in Ukraine further reduces odds that we’ll see significant quantities of wheat coming out of there any time soon. Traders are also increasing their focus on tight global supplies of corn as Ukraine focuses on planting cereal grains such as wheat rather than corn, sunflowers, etc.
Ukraine with its ports fully closed currently has been an obvious problem and why the wheat market is trading above 11.00 in my opinion. But what happens as we get closer to April if the was rages on? The trade in my view will need to consider what this all means for Spring plantings. There is noise in the market that the market is pricing in a 40 percent reduction of Spring plantings in Ukraine, but that number or percentage could go higher if the war isn’t over by late April. It is my belief that the main risk is with corn plantings. How would prices respond to a potential 40 million metric ton production loss in the 22/23 crop season if Ukraine doesn’t plant anything?
Trade Idea
Futures-N/A
Options-Sell the Dec 2022 8.00/7.00 put spread at 80 cents OB.
Risk/Reward
Futures-N/A
Options-If filled at 80 cents on the spread, one would collect that upon entry minus all commissions and fees. That is the best its ever going to get regarding the collection and potential profit. The goal is to keep as much of that collection as realistic, meaning the underlying Dec 22 futures contract would need to settle above 8.00 at expiration, to keep the whole collection. That by the way has never happened, Dec 22 above 8.00 at expiration. The maximum risk on this spread is 20 cents plus commissions and fees. If the maximum loss becomes reality it means one would give back the 80 cent collection plus an additional 20 cents or 1K plus trade costs and fees as the spread is $1.00 wide. Collect 80 cents but may have to give that back plus an additional 20 cents. Today the spread settled at 75 cents, so we need to see a correction in price to get filled at 80 cents. If filled at 80 cents , one put a stop loss at 90 cents , lowering the risk to approximately 10 cents or $500.00 plus trade costs and fees. Call or email me with questions.
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