Grain Spreads: KC/Chicago Wheat

Sean LuskGeneral Commentary

KC wheat has steadily gained vs Chicago since early December tightenting over 30 cents and trading up to a .382 Fibonacci retracement from the early Dec 19 low (-98) from the June highs at (-9). See Chart. The near term high is 64.5 KC under basis March 20 futures. The spread was weak today with KC losing two cents vs Chicago settling at 71.4 cents KC under.

Last Fridays WASDE report was considered neutral to bullish for wheat in my opinion. The USDA pegged all wheat endign stocks at 965 million bushels vs the average trade guess of 969 and 974 last month. It is a five year low for ending stocks. Soft Red winter fell to 106 million bushels from 111 in December and 158 last year. Hard red ending stocks are now at 489 million up slightly from 483 million in December. They are down from 516 million a year ago. In my view this is one reason the price of Chicago has carried such a hefty premium to KC for months. Tight ending stocks of Chicago historically in my opinion has kept Chicago at a premium vs the higher protein KC and Minneapolis contracts. Ending stocks for KC are almost 5 times as much as Chicago but the acres planted for KC are 15 million more.

The flip side and the reason in my view that KC has tightened into the Jan 10th report and gained vs Chicago the last five to six weeks comes on two fronts. First short covering into year end and ahead of the Jan 10th crop report. Second was the thinking that given the price disparity, that seedings for Chicago would exceed last year while at the same time sowings for KC would be lower. Sure enough that came true courtesy of the USDA. They reported last Friday that Hard Red Winter plantings are estimated at 21.8 million acres down 660K from last year. Soft Red Winter plantings are estimated at 5.64 million up 440K from last year. Thats over a million acre switch in Chicago’s favor. Granted its not much but it confirmed what the trade was thinking. Now what’s next? The result was a new recent high for this spread at 64.4 KC under, retesting an old 2019 late summer high.

Since the report Kc has lost over 7 cents to Chicago. It looks like it could lose more should weather forecasts stay consistent. the 6 to 10 and 8 to 14 forecasts show arctic cold east of the Mississippi without much snow cover. Winter kill in these Soft red areas will increase and with the lower ending stocks would keep Chicago bid vs KC for the foreseeable future. KC areas see cold as well but not the sub zero cold that blankets the Eastern Belt. As always these forecasts are subject to change. So trade the charts here. A close under 73 cents could send this spread to 81 and 92 cents Kc under. A close over 64.4 cents is needed to keep this spread intact. Call me with questions. Im detailing the March 20 contract here. We can look at deferred months like July 20 as an example. Kc July is only 41 cents under July Chicago. Should weather issues emerge in the East, I look for that to widen given the low ending stocks of Chicago SRW Wheat.