Grain Spreads: KC Wheat Spread Examined

Sean Lusk General Commentary Leave a Comment

Commentary

Minneapolis wheat futures have scored contract highs in six of the last eight sessions and are poised for weekly gains on tight global supplies and signs of stronger export demand. Export sales for U.S. wheat came in at  567,600 MT, up 70% from the previous week, up 42% from the prior four-week average and surpassing expectations for 250,000 to 500,000 MT. Chicago SRW futures rose as high as $7.38, up from last week’s close at $7.34, while December HRW rose as high as $7.48, up from last week’s close at $7.37 1/2. Other chart levels to watch in December SRW include this week’s low at $7.12 3/4. December spring wheat futures surged to $980.0, a contract high and the highest level for front-month futures since 2012.

In my view this market is reacting to the inflationary undertone in commodities as well as rumors of strong demand from China and Iran. China has raised its minimum purchase price for wheat for 2022 with rumors circling that they are booking Australian spring wheat due to shortages in North America and the Black Sea.  This news comes after potential bullish news last week as market chatter on Iran, where their wheat crop was said to be a disaster, down from 14 MMT to maybe less than 6 MM. The trade feels Russia has sold them a big package  maybe 4 million metric tons with two MMT already offloaded and another 2 million tons in transit. There were additional rumors  that another package is in the works. Germany is also thought to have sold a million tons to Iran. In my view, given global shortages of high quality milling wheat, that the price becomes inelastic, which translates in my view to higher futures prices. Keep in mind that the USDA Supply and Demand Report underscored tightening domestic and global supplies. USDA cut its projected 2021-22 U.S. ending stocks estimate by 5.7% to 585 million bu., while estimated 2021-22 global ending stocks were cut 2.1% to 277.18 MMT, a five-year low.

Trade Idea below, Considering KC wheat has gone premium over Chicago wheat tells me that the higher protein KC potentially could be more sought after. In my view, old crop KC could be at an advantage to new crop. High prices in my view take care of high prices. That could mean increased planting for this years (21/22 wheat crop versus lagging supplies from last years crop. I included a May 22/Sep22 (KEK22-KEU22) wheat calendar spread. This is akin to an old crop/new crop corn or bean spread, only in the this case wheat’s marketing year begins June 1st. The spread has trade above 40 cents May 22 over twice this year. Will the third time be a charm. Potential story here in my view.

Trade Idea

Futures- Bid 4 cents on the May22/Sep22 KC wheat. Spread, May over. Place a GTC stop at 1 cent May22 under.

Options-N/A

Risk/Reward  

Futures-the risk is 5 cents upon entry or $250 plus trade costs and fees. This is a low volume spread at the moment. No reason to take a lot of heat in my view. That said I have some option ideas on the outright May KC contract if the calendar spread doesn’t appeal to you. 

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