Grain Spreads: Wheat Idea

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Commentary 

USDA’s August WASDE was bullish for corn but mixed-to-bearish for soybeans in my opinion. Corn yield was cut sharply to 180.7 bushels per acre from 183.0, yet increased harvested acreage kept production near unchanged at 16.013 billion bushels; stronger demand lowered ending stocks by 137 million to 1.653 billion bushels, the most supportive number in the report. For Soybeans, the USDA numbers were overall neutral, but beans closed with double digit gains anyway on the back of strength in the other grains. US ending stocks came in slightly higher-than-expected from 306 to 320 million bushels while harvested acres were increased 1.4 million, but yields were cut slightly more than expected as western belt yield was generally down from last year and the eastern belt and southeast US above. The yield cut to 52.7 from 53.0 raises the importance of next week's Pro Farmer crop tour to gauge whether additional cuts will be necessary, mainly in the western belt. USDA did announce a morning flash sale of 244,000 tonnes of beans to China. Ongoing China demand will be important if the balance sheet is going to tighten up in coming months. Wheat was the big winner today settling over 20 cents in all three classes. Geo-political tensions the reason in my view. The report was benign for wheat today. The August USDA Supply/Demand report estimates 2026/27 wheat ending stocks at 717 million bushels, The average estimate was 718 million bushels, the range was 692-755 million, and July's estimate of 722 million. Wheat rallied sharply overnight following reports of heavy and intense Ukrainian attacks on the key Black Sea Russian port city of Novorossiysk which reportedly causing heavy damage to grain export infrastructure resulting in two grain terminals, including NKHP, one of the largest at the location, halting operations. The city’s mayor also said the water supply to Novorossiysk has been suspended, as well, due to damage from the attacks. Russia reportedly also launched attacks on the Ukrainian port city of Odesa overnight, damaging some infrastructure but specifics haven’t been released. With the report out of the way, finishing weather in August and these war escalations in the EU and Middle East should be supportive in my view. Managed funds are still short Chicago wheat and, in my view, playing with fire as this conflict continues to escalate. With that in mind, consider the following trade. 

Trade Idea

Options-Buy the November 26 Chicago wheat 680 calls. Sell the Dec26 Chicago wheat 720/680 put spread for even money plus commissions and fees.

Risk-The maximum risk here is 40 Cents or 2K plus trade costs and fees. We suggest risking 20 cents or 1K on a GTC basis on a stop loss. Offer the spread if filled at even money at a 60-cent collection at exit for a gain of $3000 less trade costs and fees. I could easily see KC wheat trading to 8.00 should the escalations continue. That could put Dec Chicago wheat up to the 7.30/7.40 area, which if realized, would put the long 680 call deep in the money. Margin approximately 1800.00 per spread. 

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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