Grain Spreads: KC vs Chicago

Sean Lusk General Commentary Leave a Comment

For seemingly months Chicago wheat, the soft red winter wheat contract has held a steady premium vs KC wheat, the hard red contract. Rallies or an unwinding of this spread have only met with further selling as Chicago at one point held over a 50 cent premium to KC in early May. Its not uncommon for Chicago to hold a premium vs KC wheat, when it has in previous crop years, the premium Chicago held was short lived. The reason why this year has been different with Chicago holding a premium over KC ( last six months), is that crop quality in hard red winter wheat states (Kansas, Oklahoma, Texas, Colorado)
showed excellent conditions while soft red winter areas (Illinois, Indiana, Ohio, Michigan) showed poor condition. The thought was that come harvest an overabundance of KC would show up with ample stockpiles while there would be a shortage of soft red winter (Chicago contract). In short there could be a supply side skew with Chicago holding a sizable price premium. Weather events and forecasts given a chance like market direction do not stay the same for long in the same areas. Due to a wetter outlook in the Heart of KC wheat country going forward, we are starting to see KC wheat, the higher protein content wheat creep back vs Chicago. Will funds sell this push again or will KC rally against Chicago and trade back near parity? European models show rain chances increasing in June while it potentially turns drier in the Eastern belt according to updated European models. This would normally be no big deal given KC wheat would welcome a warmer wetter forecast to finish the crop off. The problem this year is vast growing areas of Texas, Oklahoma, and Kansas are already under water with too much rain in May already.

Sep KC wheat vs Sep Chicago wheat traded down to 47 cents KC under a few weeks prior but has since rallied 18 cents to close today at 31 cents KC under. Should weather problems continue in Kansas, Oklahoma, and Texas as forecasted, I look for this spread over time too challenge to 20 cents under and eventually challenge the trend line at 9 cents KC under. Step carefully in here with a stop loss at either 43 or 48 cents KC under. Please call or email me with questions at 888 391 7894 or slusk@walshtrading.com. I also hold a weekly grain and livestock webinar tomorrow May 31 at 2:30 pm Central. Sign up is free and a recording link will be sent upon signup. Sign Up Now

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