Kansas vs Chicago - The Cost of Quality Wheat

Contract Lows for the Intermarket Spread; Will Outright Prices Follow?

The front month (May 2019) CBOT Chicago futures KC vs Chicago Wheat spread has found a supportive low at -28.50 cents (KC under Chicago) this last week, suggesting the market might be now arbitraging out the value in higher quality of KC Wheat. During the last year of price action, outright wheat prices have been in a precipitous decline, since making highs in early August of 2018. Now wheat prices are nearly $2.00 off last Augusts highs and markets have responded to a year of superb global production. This has resulted in a market which has increased its relative stock to usage ratio (wheat is being produced at a higher rate than its being consumed globally, which creates marketing opportunities for producers with the incentive to store grain).

The downtrend in outright prices was also reflected in the inversion of the KC-Chicago Wheat spread, where the higher quality (and deliverable against Chicago contract) KC Wheat traded at a premium to Chicago Wheat last year. Over the subsequent marketing year, wheat prices declined along side a narrowing and eventual inversion of the KC-Chicago spread, to the point where KC wheat was at a multiyear extreme discount of 30 cents (a full 60 cent swing). As seen in Chart 1, into the end of February (and continuing now into mid-March), the front month KC-Chicago (May 2019) spread has begun to reverse the year long downtrend, widening 20 cents over the last two weeks. This could be an early indication off... (download the full article below)

Dan's full article is available, complete with charts, and explainations here: