Grain Spreads: Volatile Wheat

Sean Lusk General Commentary

Commentary

Winter wheat futures rose for the first time in three sessions on short covering and corrective buying following Monday’s declines. A pullback in the U.S. dollar index earlier today also lent support to grain prices, but the index remains near a 20-year high, stirring concerns demand for dollar-denominated commodities could be hampered. Grain markets remain on edge amid conflicting factors, including growing concern over a global recession along with stepped-up tensions with Russia raising the prospect of disruptions to Black Sea supplies. Right now, we are in a tug of war situation with wheat. Bearish inputs in my view include US crop export sales that have been slow with cheaper exportable supply in South America and Russia amid a continued surge higher in the US Dollar. Bullish inputs are led by the war in Ukraine. Russian forces over the last 72 hours have attacked the key port city of Odesa with drones. This is rekindling thoughts of Russia closing the Black Sea pathway which allows Ukrainian grain to exit. In my opinion given the fact that the Nordstream Pipeline was sabotaged this AM, it appears to me that is only a matter of when not if that Ukraine’s grain exports through the Black Sea will be closed again. With that said, I am considering the following diagonal option trade in KC wheat. 

Trade Idea

Futures-N/A

Options-Buy the Jan23 10.00 KC wheat call and sell the March 23 KC wheat 11.00 call. Bid 3.5 cents upon entry. Symbol KEH23C1100:F23C1000{DG}

Risk/Reward

Futures-N/A

Options-there is unlimited risk here as one is long a January 23 call option while one is short a March 23 call option, which has an expiration approx. 2 months after the long call expires. Therefore, the rule here is as we enter into the trade as a spread, we exit as a spread. This is a volatility play for the next two months. If KC wheat stages a rally, we think the market has a chance to rally past 10.00, up near 10.90, which is around the 50 percent retracement from the Spring highs at 13.79, to the August lows at 8.07. One can place a stop loss and risk approximately 10 cents or $500.00 from entry plus all commissions and fees.

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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