KC Wheat/Chicago Wheat Spread Negative?

D

drm7

From my research on the different flavors of wheat, KC Wheat (KE) normally trades at a $0.20-$0.50/bushel premium to Chicago Wheat (ZW), due to its higher protein content.

It looks like the spread has turned sharply negative, and has been negative through two contract rolls. KEZ15/ZWZ15 is now -20. What's going on here? No export demand? Crop failure in KC Wheat? Seasonality?

The risk/reward for long KE/short ZW looks really good, but I'm afraid there's some big structural issue that makes the trade "dead money."
 
Some news on the KW-W spread:
It seems that KW (KRW) wheat is loosing the big nigerian market. That would partly explain why exports are so bad.
Wheat is difficult product, price is not the only component contrary to corn/soybean.
 
I once read somewhere that a great many trading careers have been prematurely terminated due to the fallacy that a spread "should" revert to past posture - Just sayin'
 
TraDaToR said:
I just lost a bunch on it. When it really gets close to expiry, the markets remain irrational longer than...
More...

I think there's a big club of losers on this trade. Several people I follow on Twitter, including a couple of farmers and former cash grain traders for large companies, have also been whipped recently.
 
Thanks Brighton, is it possible to know some of the guys you follow on Twitter? I have never used Twitter but It's not the first time I hear there are some good traders there...
 
TraDaToR said:
Thanks Brighton, is it possible to know some of the guys you follow on Twitter? I have never used Twilstter but It's not the first time I hear there are some good traders there...
More...

https://twitter.com/5thWave_tcronin - Former CHS (Cenex Harvest States) broker in Mpls-St Paul. Fairly young, but sharp. Recently returned to family farm in South Dakota. Writes mostly about grain. Also writes a free early a.m. note here: http://halocommodities.us/market-commentary/

https://twitter.com/morrisonmkts - Spent most of his career at Cargill in US grain and also some time in China. Then a couple of years at Doane's Ag Research. Now I think he's semi-retired but trades and also writes a daily market letter (subscription; I haven't tried it but it's not out of reach - maybe $70/mo). Seems to focus on grain and livestock spreads.

https://twitter.com/JavierBlas2 - Bloomberg commodity reporter. Tweets a lot, so probably best to set him up in a dedicated "news" feed on the TweetDeck application. Watch who he interacts with - it's surprising to me but the Reuters, WSJ, FT, Bloomberg reporters all re-tweet their competitors' stories to some extent.

I would recommend starting with Twitter and then using Tweetdeck if you follow a lot of people. I have "decks" for people I categorize as mostly ag, mostly energy, govt reports (USDA, EIA, FAO), news/analysts, and trade associations.
 
Thanks a lot for taking the time to reply. I read Tregg Cronin's commentary for Halo Commodities and was quite impressed. I guess I will add it to my daily routine : Agrimoney, Benson Quinn, Steiner Consulting on top of the DTN/DJ Agriwire on Prophet X. I like Todd Hultman and Jerry Gulke for DTN.
 
You're welcome. I chuckled when I saw Jerry Gulke's name. I have no opinion on the quality of his analysis but there are a couple of guys on Twitter who swear he changes his recommended hedge positions from report to report to make it look like he was well-positioned for a move that just occurred. I don't know if that's true, but it's good infotainment during a boring market day.

I've read some of Todd Hultman's articles and some people on Twitter re-post excerpts or his charts, so he must have some kind of following. One caution: He sometimes writes about a cash crush spread in Illinois using the weekly USDA crush report. For reasons I don't understand, the USDA - and Hultman - overstate the crush margin because the report calculates about 47 to 48 lbs of high protein soy meal per bushel. As you probably know, and I think I've written before on this site, you can get 47-48 lbs of low pro per bushel or 44 lbs of hi-pro + 3 to 4 lbs of hulls, but you can't get 48 lbs of hi-pro.

http://www.ams.usda.gov/mnreports/gx_gr211.txt

Based on the monthly Natl Oilseeds Processors Assn report (NOPA) I think the USDA also uses an optimistic oil yield of 11.62 lbs/bu. The most recent NOPA yield was around 11.2.

I suppose if the USDA report uses consistent yields/conversions, it doesn't matter, as long as someone knows that particular crush margin is consistently unobtainable. It would make more sense to use the standard of 44 lbs hi pro meal and 11 pounds of oil and if people wanted more precision they could adjust it up by throwing in the value of a couple of pounds of hulls and a couple tenths of a pound of oil.
 
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