Grain Spreads: The Last Net Short

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Commentary

Chicago wheat was the only market where trend and index following funds were still net short per the last CFTC data. With today’s limit up move, I contend that funds are at parity or a slight net long. Big question is do they get long? They are long KC, Minneapolis and Paris wheat futures and have been for some time. The main driver for wheats limit up move in Chicago was something that we have been commenting on as well. That an unprecedented wheat supply shock caused by the shutdown of Russian and Ukrainian ports in the Black Sea and the Sea of Azov. Nothing comparable has happened in the history of the modern grain market: neither in 2010, when Russia imposed its grain export ban, nor in the first half of 2022, after the war began. Until recently, the market had been in my view underpricing this story. Another possible factor was the unexpected visit of the CIA director to Moscow. He may have brought some kind of proposal for the Kremlin — or an ultimatum. There is still no reliable information. But the visit does not appear to have produced anything positive. The chances of de-escalation remain low, and another round of escalation cannot be ruled out. There is also speculation that Russia was deciding whether to broaden its war to NATO partners since they were providing aid to Ukraine. Managed Money is estimated to have bought over 70K contracts of corn, another 50+ of soybeans/meal, and nearly 25K contracts of different classes of wheat. With high wheat and corn prices, meal is the best deal on the Board in my view. Trade idea below

Buy the July 27 soymeal 4.00/4.50 call spread for 4 points or $400 per spread. Cost and risk is $400 per spread plus commissions and fees. Look to exit at 25 points at exit. For a gain of 21 points, less trade costs and fees.

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Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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