"Winter is Coming" - December KC Wheat / November Soybean Spread

Hard red winter wheat, now designated KC for the Kansas City Board of Trade where it was traded until a few years ago, is planted September/October and harvested mostly June/July. As such, the US Department of Agriculture (USDA) defines the winter wheat crop marketing year as June-May. The bulk of the US soybean crop is planted in May and harvested in October. Thus, the USDA defines the marketing year for soybeans as September-August, although November best represents the new crop because few soybeans are harvested in time for delivery in September. This seasonal difference in harvest creates contrasting patterns of supply which in turn generate contrasting patterns of price pressures, in turn generating movement in spreads between these two markets.

For example, anticipating enormous new supplies of wheat at harvest, prices tend to decline into May/June. By early July, however, the midpoint of harvest passes, exports soar, supply pressures begin to ease, and prices recover. In contrast, with soybean supplies continuing to decline into June amid still uncertain prospects for the new crop, soybean prices often rise into June. By early/mid July, however, the market is usually better able to assess the weather and crop outlook. Barring extremely adverse conditions, market anxiety begins to ease and prices to decline as production potential becomes more assured

The net effect is that wheat has usually outperformed soybeans during most of July. In fact, Moore Research Center, Inc., has found that the Long December KC Wheat/Short November Soybeans spread has closed more favorably toward wheat on about July 27 than on about July 9 for the last 15 consecutive years and in 25 of the last 30 — in which only 2 of those other 5 would have suffered a loss exceeding 18.75 cents/bushel. (With each contract specifying 5,000 bushels, each 1.00 cent/bushel move is worth $50.00.)

Last December, wheat traded at a discount to soybeans of -571.75 cents/bushel. Since then, the spread has trended steadily in favor of wheat, with both monthly highs and monthly lows progressively narrowing for six months consecutively. By June 29, the day before the USDA released its estimates of US Grains Stocks and US Planted Acreage, it had already narrowed that discount to -400.00.

Given the uncertainties in yield for hard red spring wheat — a competitor of KC wheat which will not be harvested until August — and recently reduced acreage estimates for Canadian wheat, the volatility of this spread may increase and persist during July. Commercial consumers of wheat are concerned about supplies for the next couple of years and may yet be bigger buyers. So far, the soybean crop has progressed well.

In other words, this spread may still hold great potential to move in favor of wheat. However, despite the nearly immaculate 30-year history, traders need to be cautious not only because of potential volatility but also because the spread has already run so far and is approaching heavy historical resistance near -360.00, visible on the monthly chart. The trend of narrowing monthly discounts will be intact as long as June’s widest extreme of -454.75 is not broken. The USDA will next estimate US Crop Production and World Agricultural Supply and Demand on July 12.

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Spread Trade History

Commentary and Charts Provided by Moore Research Center