KC Wheat: Examined, Will 2021 Futures Trade the 7 Handle?

Commentary:

USDA pegs the hard red winter wheat crop at 43% Good to excellent, down 3 points on the week. The five year average is 54 percent for this time of year. Number one producer Kansas dropped 3 points to 29 percent good to excellent, Colorado dropped 8 points to 17 percent good to excellent. Oklahoma dropped from 55 to 48 and Texas dropped from 30 to 24.  Ouch.  The broader condition index score that takes all five categories into account fell to and 8- year low of 322 for the week. That's the 2nd lowest rating for the crop in this week of the year on record. The biggest declines in crop ratings came from dry areas of the central and Southern Plains. It should be noted that the correlation between late November ratings and final yields is not very good. Yet, it does say that the margin for error is lower in this La Nina year.

While its early, the ratings are very subjective. Timely rains could push the ratings near unchanged vs the five year average quickly. Moisture is the key moving forward. We won’t get updated seedings until the January report. Keep in mind that ending stocks for KC wheat are at 6 year lows. The November report has stocks at 338 million bushels. Last year we were at 506 million and two years ago at 516. That is a 30 percent cut. Last time we were this low in ending stocks was in 2014 when they were at 294 million bushels. The range in KC wheat that year was a low of 5.50 to a high of 8.54  Drought like weather amid a La Nina is not going to endear anyone to the short side of the market especially when Russia and the Ukraine are talking export quotas in my view.  Ukraine has used 66.5% of the 2020-21 wheat export quota, shipping 11.63 MMT so far in the July-June season, government data showed on Tuesday. Grain traders and the government have agreed that the volume of wheat available for export this season must not exceed 17.5 MMT, down from 20.5 MMT last year. Given a weak Dollar and an inflationary environment, weather and its impact on future yields could push this market to multi year highs.

Trade Ideas:

Futures-N/A

Options- Three way option spread suggested. Sell the 750/650 put spread in July KC wheat. At the same time buy the July KC 7.00 call. Bid -75 cents.

Risk/Reward

Futures-N/A

Options-one is collecting 75 cents upon entry for a collection of $3750 minus commissions and fees. The max loss is $1.00 or 5K plus trade costs and fees. Therefore the risk is $1250.00 plus trade costs and fees, meaning you would have to give back the $3750 you collected plus another $1250. The goal is to buy them back cheaper from where we sold them. A supply side rally is what we are looking for. A close under 5.35 in the most actively traded  contract which as of this post is March 21 futures and I would suggest that one liquidate or close out the trade. However a close over 5.95 is needed for a deep run into and through 6.50 Kc wheat.

Please join me for a free grain and livestock webinar tomorrow at 2pm Central. Sign up is free and a recording link will be sent upon signup. We discuss supply, demand, weather, and the charts along with speculative and hedge ideas. Sign Up Now

Sean Lusk

Vice President Commercial Hedging Division

Walsh Trading

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