Commentary
Wheat surged higher to start the week. Attacks over the weekend by Ukrainian forces on a Russian tanker near the strategic Kerch straight brought a round of buying early in the Sunday night session, and then after a give back prompted fresh buying on dips by Monday’s close. In my opinion this escalation has the potential for freight rates out of the Black Sea move higher and an increase in insurance rates across the region. Ukraine said the Russians should consider their ports a “war risk area”. The trade ran the wheat market cautiously higher in anticipation of a retaliation by Russia, but none occurred during last night’s session as prices retreated last night and this morning’s open. Russian wheat values are back to levels below $240/mt FOB while US HRW added $10/mt to its export value. US exports dived from last week as the inspections report showed a 275K metric ton loaded vs 635K this time last year. Marketing year to date wheat export inspections total 111 million bushels, down 21% year-on-year and 26 million bushels below the seasonal pace needed to hit USDA’s target for the year. That is the tug of war that is occurring in the wheat market in my opinion. As winter wheat harvest wraps up, weak demand for US origin amid a weaker domestic basis for the most part, versus a potential powder keg that could infringe upon Russian exports that has the possibility to create major uncertainties. Global wheat balance sheets would then be a major question mark as the uncertainty and availability of exports out of Russia regarding increased freight and insurance rates would eventually be passed on to global buyers. It is similar to when your local gov’t raises sales taxes on alcohol or gasoline, the end user ends up paying the freight or increase while making the underlying commodity more expensive. The bull market though needs to be continuously fed here in my view especially since corn and bean ratings and crop prospects get better on improved weather. That said, until there is a major shift in this war where cooler heads prevail and sea lanes are unimpeded from attack, dips in wheat will be bought in my view amid the uncertainty.
Trade Ideas
Futures-N/A
Options-Buy the November 23 Chicago wheat 7.00 call. Sell the March 24 call 820 call for 2 cents OB plus commissions and fees. ZWH24C820:V23C700[DG]
Risk/Reward
Futures-N/A
Options- Unlimited risk here on strategy as one is short a call with a late February 2024 expiration while the long call expires late October 2023. Rule here is that as we enter into the strategy as a spread, we exit as a spread.
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