Last week saw major rallies in all wheat classes led by the Kansas City Hard Red winter contract. No surprise there as drought like conditions continues to plague the western wheat belt. Good to excellent conditions came in as follows from Mondays report. Kansas came in at 13 percent. Oklahoma came in at 6 percent. Texas showed some improvement at 10 percent from 4 percent the week prior. Poor/very poor ratings again showed dire conditions. Kansas was at 50 percent poor/very poor. Oklahoma at 77 percent. Texas at 63 percent. Note: wheat is grown on quality not quantity. Therefore for an extension of the rally led by the Kc contract, we need to see weather continue to erode or demand pick up measurably. Number one world buyer Egypt, continues to purchase on the world market, problem is Russia has accounted for 81 percent of the sales. This leaves the USA as a third or fourth port of origin for meaningful global export business. In my opinion the amount of winter wheat we grow or for this seasons crop don't grow, a continuation rally later this year will depend on demand and its impact on price. Its not to say we can't rally from here, but if there's no demand, it wont matter how much or less winter wheat is produced. Therefore these rallies in intra-market spreads between KC and Chicago wheat and KC vs Minneapolis will provide excellent opportunities to catch bigger protracted moves in my view. Specs and more importantly wheat producers should be sharpening the knives to take advantage. Lets take a look at a few spreads to consider.
KC vs Chicago wheat in both the May and July contracts has rallied from near parity at the end of January to almost 40 cents KC over. Simply this spread has done what it should have as the KC crop gets downgraded due to drought. Soon though this will be priced into the market. Use outright May KC futures as a trigger. If it breaks 524.6, sell the either May or July KC wheat vs the same month in Chicago and look for a spread retracement to 18 cents from 38 KC over Chicago. A futures close over 548.2 basis May futures and KC will continue to gain on Chicago most likely trading to 52 cents KC over Chicago. Use Outright KC basis May as your trigger.
KC vs Minneapolis
Please look at this if possible. This screams of a retracement possibility. Using May Kc futures as your cue from the aforementioned levels, look to buy Minny and sell Kc. In early January we advocated the opposite here and it may have run its course. Since the January crop report this spread has broke from 1.85 Minny over to just 80 cents Minny over. a sizable 1.05 move. Look to buy Minneapolis vs selling Kc if KC basis May falls through 5.24. Aggressively you can buy this spread at 84 over with a tight stop at 79 risking 5 cents. Please call or email me with questions or other relationships you have interest in.
Managed funds have gone from a heavy net short to a small net long in corn which has only resulted in a 27.2 cent gain from low to high in the first quarter of 2018. I'm pricing out the move in new crop futures from 379.6 to 407.0. Funds came into 2018 short around 200 K contracts while they now sit long close to 60 K. That's a 260 K swing with the result being a 27 cent rally. Disappointing in my view. There's a longer term bullish story for corn which I have detailed in previous posts and quarterly outlooks. In the near term, I look to be a seller here conservatively. With the massive covering, I'm feeling the buying may have dried up in the interim. You will be hearing a lot of noise in the coming weeks on how much planting of beans US farmers will engage in at the expense of corn and wheat. That was also said last year and the prior. While we could see an acreage reduction vs last year, I don't see it being by a large percentage.
Buy the May corn 380 put and sell the May corn 395 call for a collection of 1 cent. Risk to a 7 cent debit, risking 6 cents from entry.
Sell the Dec 18 corn and buy the Dec 19 corn futures spread at a 8.4 cent carry, this spread has rallied from a 25 cent carry in late December and looks to correct back to 15 under. Risk 5 cents from entry.
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I offer a free marketing prospectus for your farming and livestock operation. In my opinion grain and livestock spreads can offer the proper price protection in a conservative fashion. Call me at 888 391 7894 or email me at firstname.lastname@example.org