Grain Spreads: Wheat Story

Sean Lusk General Commentary Leave a Comment

Commentary

Global wheat prices are responding to potential new Chinese demand for global wheat supplies. China’s Ministry of Ag put out an announcement addressing its stripe rust problem as a “severe situation.” In my view this admission is significant for a government that still refuses to admit the severity of the current African swine fever problem in its hog herd. The Ministry of Ag noted that a large area of its wheat belt is now impacted that is significantly larger than normal.  Wheat futures gained for a second straight session on Wednesday, with prices also underpinned by concerns about dry soils limiting U.S. and European production prospects and cold weather in the U.S. wheat belt overnight.  A cold front is moving in this week across the wheat belt. Wheat areas could see readings fall very close to damaging levels in portions of the Central and Southern Plains in the next few days as the initial cold surge drops into our nation’s mid-section. Traders are also monitoring extreme drought in the Northern Plains and Canadian Prairies, as well as dryness in portions of Europe, while monitoring talk of a widespread stripe rust problem in China. In summation here if we see ratings get hit here next week, I think the funds return with vigor. Todays close above 6.03 takes wheat back higher on the year. Five percent higher is 633. Ten percent higher is 661. 15 percent is 693, while 20 percent is 724. I’m going to consider selling a put spread in KC wheat that would be static in nature and get a long position on the cards. I think if KC wheat has “a story”, we could trade up to 20 percent higher on the year as we have in old crop corn and beans.

Trade Idea-

Futures-N/A

Options-Sell the July KC 720-620 put spread at 80 cents.

Risk/Reward

Futures-N/A

Options-The risk on this trade is 20 cents or 1K plus commissions and fees. One is collecting 4K or 80 cents on the way in minus commissions and fees. The max loss is 5K or 1.00 plus trade costs and fees. Subtract the collection from the max loss and that gives one the risk plus trade costs and fees. Technical support  levels in KC wheat are at 6.03. A close under could push the market to 5.88. If 5.88 doesn’t hold, I would buy back the put spread and close the position. Please call me with questions.

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