Grain Spreads: KC/Chicago Wheat

Sean Lusk General Commentary Leave a Comment

Commentary

The wheat markets went into the January 12th WASDE report on a downer, having retreated over a dollar in the last 15 days. USDA added more fuel to the bear fire in my view with increases in carryover and reduced exports sending prices into new lows on Friday Jan 14th. December 1 stocks were 1,390 billion bushels, down 18.5% from last year. Implied disappearance of 384 million in the second quarter equated to a usage reduction year to year of 16%. If there was a surprise on report day in my view it was that HRW (KC Wheat) acres were lower than anticipated and SRW (Chicago) much higher. Although world prices are trumpeted as higher from those with wheat to sell, clearly, the U.S. needs China business to come anywhere close to USDA estimates in my opinion. At the rate the US is shipping wheat, the USDA could be 50 million bushels too high in its estimates and thus the carryout is headed to 675 (mbu), from 628 currently. Wheat export news will be one key to futures direction, and any improvements could help stabilize prices. I look for the winter wheat outlook to come into focus in early February, when various states will update their ratings of wheat crop conditions. Dryness continues to grip the U.S. Plains, leading to potential concern for high acreage abandonment. Northern Plains conditions potentially affecting spring wheat plantings may also be a price factor. I included a May Kc wheat vs May Chicago. We closed last week at 3.6 cents KC over Chicago. Looks to me like Chicago wheat can continue on KC amid an unwind of long KC/Chicago wheat spreads and to a lesser extent selling wheat vs corn. New crop contracts on these spreads is where to enter for a bigger protracted bounce in my opinion, but if you are looking for a short term bounce from a near term oversold condition, see if the gap holds at 1 cent KC Wheat over which is essentially the 50 percent retracement of the last summers low, to this Falls high.

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