Commentary
Wheat in all classes as been the leader in the Ag sector as the market turns the calendar to October. Fresh inputs from the USDA yesterday showed its all wheat production estimate downward by over 50 million bushels, with hard red winter losing 28 million, other spring losing 12 million and white winter losing 9 million from the August estimate. This comes after recent declines in output from Canada and Russia. Supplies of quality milling wheat are tight in the world, and yesterday’s numbers reinforce that fact in my opinion. In summation an already short crop got smaller. European Union milling wheat futures pushed to a new contract high on the news while Russian wheat export tariffs will reach a new high of $57.80 per MT for the week of Oct. 6-12, a $4.30 jump from the week prior. The weekly formula-based duties intended to curb food price inflation have climbed steadily since their June launch. I included a KC/Chicago Dec 21 futures spread. We write about this relationship periodically as the premium of Chicago over KC intrigued us for some time. However that premium has faded as KC has taken the lead here. In my opinion, the absence or shortage of quality Spring wheat or Milling wheat futures has severely dwindled, potentially making the higher protein KC variety more sought after than soft-red winter or Chicago wheat. In our view we could see KC extend in the weeks and months ahead until potentially next Summer. The last two years Chicago wheat has held a premium over KC for the most part and in a few instances traded to 90 cents over KC. Today it settled 4.2 cents under Kc. In 2011 and 2014, Kc has traded as much as 1.45 over Chicago. Bottom line here we think that Kc has the potential to trade to more of a premium to Chicago due the fact there’s a story here with then USDA’s numbers possibly verifying this with yesterdays report. Call me with questions. I’m going to refrain from putting a specific recommendation here but would add that options are a possibility if the futures spread doesn’t interest you. If you do play the spread use a GTC stop loss always.
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