Grain Spreads: Corn and Wheat Hedges

Sean LuskGeneral Commentary

Both KC and Chicago wheat have taken off versus corn since the end of June with Chicago at 2.00 over corn and KC $2.10 over. This widening is not unprecedented looking back at wheat vs corn in a 5 to 10 year time-frame as we have seen wheat move 3.00 to 6.00 over going back a decade.  There are long term question marks regarding global wheat production that keeps an underlying bid in the market. Europe is in the midst of a severe drought. Russia, Ukraine, Australia, and even South America are suffering some type of weather hiccup with sizable percentage drops in production as well due to a lack of moisture in some areas, with too much rain in others hurting quality. Recent crop tours in the Spring wheat areas of the Dakotas, Minnesota, and Montana showed surprisingly lower yields giving thoughts to lower domestic ending stocks potentially on future supply/demand reports. The fear of lower production could continue to adjust balance sheets domestically and around the world and to me that is the reason for the rally in wheat.

Because corn can’t get out out of its own way to return new crop contracts (Dec 18, March 19)over 4.00 tells me some in the trade learned some lessons from last year. Lets put trade issues concerning NAFTA and with China aside for the moment. I spoke with farmers from the Dakotas down south to Texas last year, and from Ohio east to Colorado. The majority of them were astonished to find that even with a severe lack of rain from late July through all of August in some areas, that yields bested their expectations by over 40 bushels per acre in some spots. I think this speaks to the advancement and potential of  bio-genetic seed. While the USDA continued to show porous weekly good to excellent conditions on their reports, the monthly supply demand reports showed the opposite creating confusion. The bearish supply side data monthly reports won out and prices plummeted into the 4th quarter and year end. With the crop being early this year, will the USDA come in towards the high end of expectations at 180 B.P.A. on the next two surveyed monthly reports? Corn for the most part shows optimal condition this year coming in at 72 percent good to excellent for major producers on a 18 state average. This is well above 5 and 10 year averages.  As we enter into August with a early planted crop, is the crop made? While wheat looks to extend on its own regarding withered global production, without a rally in beans I could see further downside in the near term for corn unless something else enters into the market. Longer term there is a bull story for corn, but to me the path of least resistance looks lower unless saved by a massive bean rally.

Corn Hedge Trade Ideas

Using March and May 19 options: Buy the March 390 put for 20 cents. Sell 2 of the May 19 460 calls for 10 cents apiece. Cost to entry zero dollars, minus commissions and fees.

If you would rather play futures: sell the Dec 18/Dec 19 corn spread at a 23 cent carry with a three cent stop at 20 cents Dec 18 under. Objective to 40 cents under.

Wheat: I’m sharpening the knives to catch a break but the charts tell me we could be moving higher in the near term. Producers could consider the following:

Using July 19 KC wheat options: Buy the July 19 550 put and sell 2 July 19 8.00 calls  for a collection of 10 cents. This assumes a wheat producer does not mind being short the board at 8.00 on a percentage hedge if we ever got there. This spread settled at a 4  cent collection today. A retest of  last years spot KC highs at 577 basis September could put the July 19 ratio at a 10 cent collection.

If looking for futures, consider the following: Sell Dec 19 Kc wheat vs buying 1 Dec corn at 2.26 Kc wheat over. Buckle up if filled. Exit on a close over 611.4 in spot Sep KC futures. Lots of risk with this one but I’m looking to sell a spike rally on this spread ahead of Friday’s report.

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