Ag Outlook: Kansas/Chicago Wheat Trade by Sean Lusk
May 07, 2014
It is my belief after watching price action in wheat that an opportunity may be coming for a spread trade between Kansas City Wheat and Chicago Wheat.
View From The Fields
A crop tour of key producing states took place last week with no surprising results. Oklahoma wheat yields were estimated at 18.5 bushels per acre. That compares to 31 bushels per acre last year. Production is estimated at 66.5 million bushels down from 105 last year with 55% of Oklahoma was rated in severe drought conditions as of April 22.
The number one winter wheat producing state Kansas, has estimated production at 260 million bushels, down 18% from last year and 72% of the state is in severe drought conditions. Yields were estimated at 35.1 bushels per acre compared to 43.8 last year. Plants are considered short with fewer kernels. This led to the spread, long Kansas City wheat short Chicago Board of Trade wheat which expanded again this week. This has been mentioned on our Thursday 3 p.m. webinar several times that buying Kansas City selling Chicago Board of Trade wheat was a viable spread as long as the drought continues.
Harvest Begins Soon
However the spread has about run its course as harvest should start to begin in the Southwest late May, that's when traders will begin to sell Kansas City and buy Chicago Board of Trade. Reasons are we are pricing Kansas City wheat higher now because of drought conditions amid lower production.
But as harvest gets underway the low quality wheat suitable only for the feed ration will drive the U.S. to a number two or three port of origin in the world to buy wheat from. The number one exporting country will be whoever produces the highest quality. Traders will begin to buy Chicago Board of Trade wheat as the quality of that wheat is much higher with proteins up higher as well. That's where the demand is going to be. A Russian/Ukrainian War might exacerbate this condition as well.
Depending on one’s appetite for risk, I would look to buy Chicago Wheat and sell the Kansas City Wheat at a spread price of 1.10 or better Kansas City over basis July Futures. This spread has gone parabolic over the past few weeks (see chart) and for the aforementioned reasons is possibly due for a correction. I would risk 20 cents on the spread if filled at $1.10 putting a stop in at $1.30, risking $1,000.00 on the trade plus all commissions and fees. A more conservative version of this trade would be to trade mini contracts of this spread which are one fifth the tick size. If one were to trade two mini’s using the aforementioned levels, the risk on the trade is $400.00 plus all commissions and fees.
For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday* at 3:00 PM central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. If you cannot attend live, a recording will be sent to your email upon signup. Or please contact me at anytime at firstname.lastname@example.org. If you would like to recieve weekly invitations to our weekly webinars, please Subscribe to our list and select webinar sign-ups and recordings. *Please note that this week's webinar has been rescheduled for next Thursday, May 15th.*
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.