Grain Spreads: KC Wheat Strangle

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Commentary

Despite recent rains, the US winter wheat crop rating remains stressed, and the planting of the spring crop is slow. Wheat rocketed higher with weather forecasts net wetter for the Southern Plains and the Southeast but lacking rains for the driest areas of the Southern Plains including KS, OK, and Nebraska. Wheat crops are seeing weather stress in Australia and China as well.  National winter wheat ratings held steady week over week, but KS is down another 1% to 23% (avg 34%). Texas also fell 2 points to 12% (average 26%). Colorado dropped 6% to 8% (avg 33%) despite the rains. Other states improved to offset these declines, but they do not hold the attention like Kansas. Heading stats show the crop is advanced in its maturity. 43% of Kansas wheat is heading vs an average of 11% by this week. Adjusting the KS yield according to current conditions, the state yield is likely close to 36 bushels per acre and a major contributor to a loss of 200 million bushels from the USDA’s total wheat production forecast. This solely could possibly drive the carryout down to 760 million bushels which in my view comes nowhere close to a rationing situation for the total US crop but does stress the subclass Hard Red Winter or KC Wheat that could possibly require substitution or rationing of HRW. Where do wheat prices trade to from here? In my view we won't be at present levels in the next 60 days. Strangle opportunities are advantageous in my view. 

Trade Ideas

Futures-N/A

Options-Using two different months Buy the July KC wheat 8.00/9.00 call spread for 7 cents or $350 plus commissions and fees and buy the Sep KC 6.00 puts for 6 cents outright. Package together for a total cost of 13 cents or $650 plus call commissions and fees. 

Risk/Reward

Options-Risk no more than 10 cents from entry on the package or $500 using a GTC stop loss and offer the spread package together at 40 cents to exit all legs of the spread, to close the position. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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