Grain Spreads: Wheat vs Corn Part Two
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Commentary
The wheat market finished with some follow through from yesterday’s rally closing strongly. The Chicago contract still has some work to do to take out and close above the top end of the recent range at 567. Corn’s rally aided wheats cause today n my view as well. The short covering in wheat by funds is no surprise to me here after we have seen Open Interest jump considerably over the recent move lower. Global cash markets are firming up helping to support values with a lot of uncertainty surrounding proposed tariffs into the weekend. As covered in yesterday's remarks, it is my belief we could see wheat gain on corn moving forward. The fund structure, funds long approximately 350K corn and short 90K in wheat may start to unwind. Shorting wheat here is becoming less attractive the last few sessions. Values have been trading in a well-defined channel and while technical's point to a test of the upper end of this range, we will see if buying support can push us above last week’s highs in the Chicago contract. Bullish news in my opinion is providing support. Ukraine export prices are higher this week on firmer demand and tightening supplies as ending stocks there are 26% below last year. Russian ending stocks are also expected to be well below last year and the possible tightening Black Sea supplies may continue to provide support. The Russian Agriculture Ministry says that 82% of winter crops are in good and satisfactory condition. It also says the planted area will likely increase by 1 million hectares year over year. Private forecasters are highlighting a cold blast that will likely cause some winterkill for Russia 11-15 days out. After a 5 dollar/mt boost yesterday, Russian values settled unchanged today. US dryness is potentially becoming something the trade is more focused on as the US draws closer to breaking dormancy. I still like buying wheat versus corn on dips.
Trade Ideas
Futures--Buy the July 25 wheat vs July 25 corn spread at 70 cents OB, with an objective to 1.38 for a gain of 68 cents minus commissions and fees.
Options-N/A
Risk/Reward
Futures--I would risk no more than 10 cents here plus trade costs and fees. This trade can turn into a widow maker quickly. Place a GTC stop loss at 60 cents July wheat over Corn. If you enter in at 70 and the spread moves in your favor to the high of year near 85 cents, I suggest trailing the stop to 70 cents so that the worst-case scenario is near breakeven
Options-N/A
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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