Grain Spreads: Wheat Potential

Sean Lusk General Commentary

Commentary

Yesterday’s release from USDA had the initial winter wheat crop estimate of 1.174 billion bushels. If realized it would come in at 103 million bushels below last year and 65 million bushels below pre-report expectations. Per USDA, the hard red winter wheat crop is estimated at 590 million bushels, down 159 million bu. from last year and 95 million bushels lower than traders anticipated. The soft red winter crop is estimated at 354 million bushels, down 7 million bushels. from last year and 5 million bushes less than expect[1]ed. White winter wheat production is estimated at 230 million bushels., up 63 million bu. from last year and 31 million bushels. more than anticipated.

That combined with USDA’s numbers for Ukraine to refocus the trade on the tightness of world corn and wheat stocks, while a continued decline in old-crop soybean stocks did the same for soybeans in my opinion. Ukraine corn and wheat production for the 2022-23 marketing year was pegged at 19.5 million metric tons & 21.5 million metric tons respectively, down from 42.13 MMT and 33.0 MMT the previous year. Exports were curtailed even further, with corn and wheat exports for the next marketing year pegged at just 9 MMT & 10 MMT respectively. Post report reaction sent Chicago and KC wheat limit up yesterday, and KC wheat saw follow through buying today. In my view, there are many bullish inputs that are being reflected in prices with KC wheat a stones throw from $13.00 and Chicago at $12.00. Should crop tours in hard red winter wheat country show further declines, we could eclipse the March highs and move towards 14.00 in KC and 13.00 in Chicago wheat in my opinion. With this in mind consider the following trade. 

Trade Ideas

Futures-N/A

Options-I’m looking at the following diagonal option strategy. Symbol is here. ZWU22C1350:Q22C1250[DG]. Buy the August Chicago wheat 1250 call and sell the September Chicago wheat 13.00 call for 6 a cent debit. 

Risk/Reward

Futures-N/A

Options-Unlimited risk here as one is short a call option that is 34 days longer in duration than the long call. As we enter as a spread it is imperative in my view to exit as one. I’m looking for a sharp move higher that has the potential to reach the March highs above 13.60. It’s a big ask here, but with global supplies in limbo, it is a possibility in my view. If filled at – 6 cents, it is advisable to put a stop in at a 4 cent credit. This risks approximately 10 cents or $500.00 plus all commissions and fees. Call me with questions. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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