This is an excerpt from a newsletter I received: "Chicago wheat is trading at a 10+ cent premium to KC Wheat, which is a higher protein wheat. Typically KC Wheat trades at a premium to Chicago. Current levels of this spread offer the opportunity to Buy KW and Sell Chicago wheat. " I'd like to get some knowledgeable feedback regarding this inter exchange spread idea. Thanks
I will try to help you here as most of my grain trading is in calendar and intermarket wheat spreads. As you know there are 3 main types of wheat each with different amounts of protein. The minneapolis contract has the most protein while the KC has the second most and the Chicago having the least. Now the protein content matters because that is as a rule what you pay for in the wheat. Since the Minn has the most it is usually the most expensive and sought after by millers. This is also why importing countries come for the Minn and KC crops not usually the Chicago due to the protein content. Like now what is happening is that we have had a terrible KC crop that has been the victim of disease caused by massive rains in the southern plains and has reduced yields substantially. The Chicago crop has done better than the KC but still could of been better. Due to all of the speculative interest in Chicago that market tends to get really out of wack with the other smaller markets and can be out of wack for a long time. In the Minn crop we have really a pretty decent crop so far but it is starting to deteriorate but that usually will happen everytime we start to get close to harvest and the crop matures. The thing with Minn is that although it is the best wheat crop we have you would think that it would be the weakest of the wheats throughout the year unless you think about the demand factor. You see the KC and Chi are so poor that millers are going to have to blend the Minn with them to make it even millible for bread and such. This should give Minn and extra boost over KC and Chi. That is why I favor both KC and Minn over Chi wheat throughout the rest of the year. I know I have rambled on too much now but it can be kind of a confusing subject so I hope this helps you out.
Commercial users will pay a "premium" for clean grain. Grain subjected to moisture, disease or infestation gets "discounted" in the market, regardless of protein content.
Yes that is true but they will have to bid up if they want premium KC and Minni wheat wont they? Nobody ever pays anything for poor wheat anyway. Everyone in the wheat market knows that importers mostly come for the HRW and HRS not the SRW.
From your experience what long time means? few weeks, months, etc. Let me see if I got it right: KC wheat is usually more expensive because of its higher protein content. However this year the yields have been reduced due to the weather and disease. So the fundamentals are bullish for KC wheat, right? On the other hand speculative trading on CBOT drove the prices of Chicago Wheat higher compared to KC wheat which experiences less speculative buying/selling. Thanks
Nazzdack ... You seem to disagree with Youngtrader ... What are you trying to say ... KC Wheat is discounted because is not as clean as Chicago Wheat? If my assumption is correct you don't believe that Buy KC Wheat and sell Chicago Wheat is a good idea, right? Thanks
Sorry didn't read all your post. The spread can stay out of wack for a long time. So far it has been a few months. But now we are starting to get some nice export demand from the HRW and that should help move it back in line with the SRW. Nazzdack I now know what makes a market Difference of Opinion!
Forgive a dumb question, but don't the contract specs specify a certain quality of grain? So regardless of the state of most of the KC crop, aren't you really trading two different kinds of grain at similar quality? Also: in my research, what I have noticed is that KC usually trades at a premium, but virtually never gets strongly negative, and will eventually move back positive even if it takes months. So, with the spread at just about it's lowest level in 20 years, and the two contracts canceling out each others' carrying charges, it seems to me to be a very low-risk play...