Commentary:
After a few years of Chicago wheat trading to what insiders called “an abnormal premium” to the higher protein KC, the wheat spread started to correct to more of a normal relationship favoring the higher protein KC. Hard Red winter began to gain vs Chicago early last August when corn and beans also put in their lows and started their end of year rally. Ending stocks for KC dwindled vs the year prior and 3 year averages from a 500 bushel carry to 330 million this crop year. Chicago had a smaller decline from a 107 million bushel carry-out to just under 100 million bushels on the carry. Yesterday’s crop report did little on the overall balance sheet as ending stocks for all wheat at 833 million from 836 last month. However KC wheat ending stocks were projected higher by 21 million bushels. While not overly bearish in the big picture in my view, the increase coupled with increased rain chances in the hard red winter wheat belt have given thoughts to a crop getting bigger, not smaller, while the future size soft red Chicago contract is mixed. We will start getting condition reports soon from USDA as the crop breaks dormancy amid private surveys out of the fields soon by early to mid- April. The spread seen on the chart below spent a few days with KC at a premium. But that didn’t last long. Should the pressure vs KC continue, I look for this spread to potentially test the 50 percent retracement level at 36 cents KC under. The spread settled at 20 cents KC under today. However a close under 8 cents KC under and I’m out because I think the spread may trade back to parity here near the February 9th highs. Please use appropriate risk stops when trading these spreads. Caution is urged here. Please call me with any questions to talk strategy here using options on outright contracts or for hedge purposes.
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Sean Lusk
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