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Commentary
Wheat finished strong and near the highs of the day on Black Sea events and the slow US winter wheat sowing pace. Major HRW states Kansas, Oklahoma, Texas and Colorado were all well behind average, although last week's rains will allow farmers to get a significant portion of the crop in the ground over the coming days, but follow-up rains will be needed after extended drought this summer in the southern Plains. I do not suspect the trade is too worried about the crop getting in the ground, there will be enough planting windows albeit a bit late this year, but it will get in. The bigger news in my view is that a tanker is on fire in the Black Sea and a Turkish grain ship hit by a drone sunk, while Russia also hit a couple of other ships off the coast of Bulgaria overnight. Videos went viral globally showing the smoking damage of another Russian tanker burning after being attacked by Ukrainian drones outside the port of Sochi. It wasn’t just that event, but the cumulative number of ships and port assets attacked this week continues to climb. There was also talk of insurance companies withdrawing further from the Black Sea market. Rumor mill aside, funds are still bet short Chicago wheat and the escalations in my view could test their resolve. Outside reversal in Dec Kc wheat yesterday did see the follow thru price action today and took out the high from yesterday also, pretty nice setup now to go back and challenge the resistance at the 50-day moving average at $7.71 potentially. I think Chicago is way too cheap and is discount long term in the July contract. Trade idea below.
Buy the July 27 Chicago wheat 8.00/9.00 call spread, while selling the July 27 Chicago wheat 9.00/8.00 put spread. Bid the spread at a negative -65 cent collection.
ZWN27C800:900: P800:900[1-1+1-1]
Margin -$832 per spread
Risk-Maximum risk at expiration next June is 35 cents plus commissions and fees. If filled at a 65-cent collection, we will risk 20 cents on a GTC stop loss, rising approximately 1K plus trade costs and fees. We feel that July 27 wheat will eventually take out its contract high at 8.05 and trade to the 850 area, should that occur in the weeks to come, look to exit the spread at positive 20 cents, for a gain of 85 cents less trade costs and fees.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
312 957 8103
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Walsh Trading
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