Commentary
Frosts and freezes potentially hit U.S. winter wheat areas last week, with many areas of the Plains and Midwest recording low temps for multiple days. Damage assessments will take weeks and won’t likely be fully known until harvest. Based on maturity of the crop and temperature readings, Oklahoma’s crop was likely hit hardest. Per Pro Farmer temperatures there broadly dropped into the 27 to 29-degree range, with pockets of 23 to 26 degrees noted, while much of the state’s crop was in the boot stage or starting to head. Temps weren’t as low further south into Texas, though some pockets could have sustained crop damage. Crop maturity wasn’t as far along from Kansas northward, but isolated damage from the freeze was likely. Damage to the soft red winter wheat crop in the Midwest, Mid-South and Southeast was likely limited.
Should this be the case and the hard red winter wheat shows substantial damage versus the soft red crop, we could see KC futures, which have a higher protein content, gain on Chicago and trade back to parity come late Spring. This spread has been a head scratcher for years in my opinion ever since Chicago pushed out to a Dollar premium over KC back in 2019. That abnormality has been reeled in since, but Chicago prices have traded over KC through the pandemic until February 9th of 2021, when KC traded 2.6 cents over Chicago for a brief moment. Given the unknows of damage to hard red winter wheat areas versus Soft Red winter ratings that are showing very high condition ratings, one could make the argument that KC could at least trade back to parity and towards the February highs later this Spring in my opinion.
Trade Idea
Futures-Buy the July 21 Kc wheat and sell the July 21 Chicago as a spread (KEN21-ZWN21) at -32 cents.
Options-N/A
Risk/Reward
Futures-If filled at -32 cents. Risk 11 cents upon entry by placing a GTC stop at -43 cents. One is risking approximately 550 dollars plus commissions and fees. I’m targeting the Feb 9th high on this spread at 2.6 cents KC over as a potential exit.
Options-N/A
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