Grain Spreads: Wild Wild Wheat

Sean Lusk General Commentary Leave a Comment


Both Chicago and KC wheat appeared ready for a possible upside breakout as we closed last week. Was it simply month end profit taking? It’s possible given the twenty cent break in prices for both the Chicago and KC contracts to begin this week. The Monday/Tuesday break provided some bargain buying today in my view as traders weigh the impacts of persistent dryness in the southern plains in the 6 to 10 day and 11 to 15 day forecasts. A Tropical depression is forming in the Gulf of Mexico. Most models have it turning north to hit the United States early next week. However, forecast models are creeping the anticipated path further and further to the east. It was originally expected to make landfall in Texas, but now the most likely path is just west of New Orleans. The creep eastward lowers the risk for some oil platforms in the Gulf of Mexico that are off the coast of Texas. It also has significant implications for major crop growing regions. It suggests that dry areas of the Plains have much lower opportunities to see moisture from the storms path. It also means that areas of the western Midwest that have been drying out in recent days may also miss out on that moisture. These storms are very unpredictable and in my view have had very much to do with the movement in the wheat market, especially the KC winter wheat contract.

Hard Red winter wheat (KC) lost three points in the good to excellent condition updated on Monday. The USDA has good to excellent at 51 percent vs 54 the week prior and 64 percent last year. Top producer Kansas rose two points last week from 40 to 42 percent. Oklahoma lost 4 points from 60 to 56. Texas lost 3 points from 42 to 39, Colorado lost 1 to 31, and Nebraska lost 6 points from 70 to 64. The drop in ratings led to a futures loss of over 11 cents on Tuesday. I attribute some of that loss to the anticipation of potential rains from the storm. That may have dissipated given updated forecasts of continued dryness in the winter wheat belt. While rains look absent for the winter wheat belt, recent precipitation in the EU and Black Sea areas are said to have reduced crop stress there. The Ukraine will begin harvests soon amid ample supply. It is also anticipated that Russia will lift export quotas July 1st. Technically in my view a close over 478 is needed for the market to run over 5.00 to my first upside bullish target at 535.0 which represents 10 percent higher for the year. The near term low at 438.6 basis July Kc futures just missed ten percent down for the year at 437. A close under 442 would take the market to 420 then 409 in my view. Chart below. Within these levels is a range bound market for now in my opinion.


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