Grain Spreads: KC/Chicago Wheat

Sean Lusk General Commentary Leave a Comment

Kc wheat showed some life rallying to new near term highs at 439 on Tuesday. The market gave all the previous days gains back Wednesday, and dipped below 420 Thursday morning, before recovering slightly into the close to settle at 422.0 Dec 19 futures. 422.0 is weekly support and then 418.4 is another level of support on the daily chart. Chicago wheat rallied in tandem on Tuesday posting a 10 cent gain but like KC gave it all back, trading down near key support at 5.03/04 into Thursday morning. The KC/Chicago wheat spread has seen a tightening lately, as KC has slowly gained on Chicago. This spread has been a head scratcher for some in that Chicago has held an abnormal sizable premium vs KC for months. The KCZ19/WZ19 spread pushed out to a historic record 99.4 cent premium Chicago over on 10/18/19. Since then it has narrowed some to 85 over KC. A big reason in my view for the Chicago contract to have sustained a hefty premium over KC is that ending stocks for soft red winter wheat are approximately 300 million bushels less than the higher protein hard red winter contract (KC). The spread differential is one of the results of the disastrous wet Spring in the soft red winter wheat growing areas in my view. Given that the shelf life on the December spreads ends at month end, lets look at the March 2020 KC vs the March 2020 Chicago inter market spread. (See Chart) Spread traded down to 92 cents KC under in Mid October and has since rallied 18 cents off the lows and settled today at 80.2. I’m noticing off the chart that the last three times sellers emerged here they bought the spreads back, buying the dips. This spread has been in a downtrend for about a year, and there have been plenty of head fakes when the bottom was thought to be in. Recently they bought it back at 88 cents, 86.6 and just this morning at 82 cents. Should KC catch a run here vs Chicago, I think we can move quickly to 65 under and then near 40 cents under. Note: Fundamentals should they emerge or matter have KC wheat plantings at 109 year lows according to some private forecasters. Should we get a weather problem, too dry, winter kill, etc,..I look for the KC to gain on Chicago. If one wants to bypass the futures spreads, one could buy the March 2020 KC wheat 450/490 call spread for 6.4 cents. Or aggressively sell the July 2020 KC 6.00/5.00 put spreads at 91 cents. There is 9 cents of risk and one would collect 4500.00 per spread minus commissions and fees. Otherwise look to buy the KC/Chicago wheat spread at 82/81 cents KC under , with a stop loss on a close below 89 cents.

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KEH/ZWH

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