Grain Spreads: Wheat Outlook

Commentary

Wheat keeps pushing higher across all three classes as supply side concerns continue to offset any weakness near term demand. Wednesday at 11am central time, the market gets its first look at 2021/22 ending stocks projections. The average trade guess is 751 million bushels for all wheat, with a range of 644-941, as compared with 852 million this past crop year. That’s lower than we have seen in the last three to four crop years as wheat ending stocks came in between 900 million to just over one billion. The surge higher in corn prices has given thoughts to increased feed demand for wheat to livestock. Also, it is my belief that the weaker tilt in the Greenback which was exacerbated even further by todays disappointing jobs data, could push this market even higher. The wide range of pre-report ending stocks guesses into Wednesday's report tells me the odds that we could see a potential surprise number either bearish or bullish versus expectations. However, it’s my contention that wheat could follow corn in the near term here as well. But which way? I’m increasingly getting interested in wheat and maybe looking to bet both ways using weekly options. Twenty percent higher on the year in Chicago wheat is at 7.68. If we blow through that level, we can trade to 8.00 in my view which represents 25 percent higher on year. Should that happen, its my belief that a bullish ending stocks number on Wednesday will be the catalyst. On the flip side, if we get neutral to bearish data versus expectations, we could see a significant pull back across the grain board the last half of May as funds may book profits around the midpoint of the second fiscal quarter. (May 15th) Keep in mind wheat has rallied 1.75 from the March 31st lows prior to the acreage numbers released on 3/3½1. One way to play this is with an option strangle using different weekly expirations in my opinion.

Trade Ideas

Futures-N/A

Options-Buy the Week 2 Chicago wheat 8.00 call and at the same time buy the Week 4 7.00 put. Bid 9 cents or $450.00 plus commissions and fees.

Risk/Reward

Futures-N/A

Options-the risk on the trade is $450 plus commissions and fees. We are looking for report day volatility on Wednesday.

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Sean Lusk

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