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Commentary
Wheat prices rallied sharply yesterday on weather concerns in my opinion and were higher again this morning led by the KC contract. However, cease fire talks in Eastern Europe and maybe some progress to a short-term cessation of hostilities particularly in regards to energy producing areas such as refineries and grain storage facilities sent crude oil and products negative. The news in my opinion sent Chicago wheat to give back its gains and close in the red while Kc gained just 2 cents on the day after being up 12 cents. Funds have been aggressively short covering for the last week as dryness and high winds continue to plague the southern half of the Plains. According to the National Weather Service there is little precipitation in the forecast over the next 2 weeks for Kansas, Oklahoma, and Texas. Outside of eastern Nebraska, the rest of the Plains are expected to stay mostly dry. It is my belief that the main thing the recent dust storms have highlighted is the drought like conditions that have impacted the Southern Plains for the last 30 days as we approach the Spring growing season. The 6 to 10 and 8 to 14 day maps this afternoon continue to show no change in the current pattern and with the concerns mounting for not only the US but for the Black Sea as well. This potentially will keep the fund shorts nervous. Managed money is projected to be short 43K in KC and 69K in Chicago. The USDA released some individual state ratings yesterday afternoon which showed mixed results. Kansas ratings fell 4 points, Texas and Oklahoma held steady from last week, and Colorado posted a good first weekly rating of 60% good to excellent. Export inspections came in yesterday at 492K metric tons versus last week at 241k metric tons, year ago at this time was 394k metric tons. I feel that at least in the near-term dips need to be bought. Today was classic turnaround Tuesday as fundamentals entered into the market in the form of a cease fire. In my opinion wheat followed energy lower. However, I feel this cease fire wont last long despite the best efforts to stop the fighting. I see the Russians dragging this out for some ridiculous concessions that Ukraine and the EU will balk at. Again, this is my opinion, and I hope I’m wrong and the war will end. Whatever happens weather and its impact on future yields is what matters most in my view. Should weather stay dry in the plains and Black Sea, I look for funds to bail on their shorts and possibly go long. Trade idea below.
Trade Idea
Futures-N/A
Options-Buy the Sep Kc wheat 7.00/8.00 call spread for 10 cents OB on a GTC basis.
Risk/Reward.
Futures-N/A
Options-Sep KC wheat settled at 632 today. I could see it challenging 7.00 if a weather premium in the market emerges. The risk is the price paid here which is 10 cents or $500 plus commissions and fees. Risk no more than 6 cents from entry plus trade costs and fees. Offer the spread at 40 cents to exit for a collection of 2K minus all trade costs and fees.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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