Kansas City/Chicago Wheat Spread: Roll to May Contracts

Patience Is a Virtue

Historically, Kansas City wheat usually trades at a good premium over Chicago wheat. There’s no mystery to it: KC wheat is a better grade than the CBOT wheat. Therefore, it should be reflected in the price.

Once in a while, though, the KC wheat will get priced at a discount to CBOT wheat. It has always been a buying opportunity, so we watch for it.

The spread inverted last year. So we started looking for a place to buy. And on November 30th, the blog bought the KC/Chicago wheat spread at -2 3/4 cents (premium CBOT wheat).

Here we are nearly three months later, and the spread is priced only a couple of pennies different from where we got in! Granted, that’s still better than where it was priced just a couple of weeks ago.

But you’d think that, after a nearly eight months of a discounted price on the nearest-futures spread, that it would be well on its way back to normal by now. Based on history, we’re looking for the KC wheat to reach a premium of 35 to 40 cents or more over the Chicago wheat.

Hasn’t happened yet. Nonetheless, we soldier on.

Pass the Wheat Rolls, Please

Monday is First Notice Day for the March grain contracts. That means we need to get out of the March contracts by tomorrow…or risk getting delivery notices on the long contracts. That’s not my idea of fun. The thought of getting 5,000 bushels of wheat for every long contract I have makes me very gluten intolerant!

May KC wheat CBOT wheat spread daily (200-day MA)

May KC wheat CBOT wheat spread daily (200-day MA)

We are going to stay the course with the long position in the KC/Chicago wheat spread, but we need to rollover and buy some more time. Therefore, we’ll liquidate the March contracts and immediately get into the May spread.

Trade Strategy:

At today’s market-on-close, sell the long March Kansas City wheat contract and simultaneously buy one May Kansas City wheat contract. Also, buy back the short March Chicago wheat contract and simultaneously sell one May Chicago wheat contract. This will liquidate the March spread and open a long position in the May spread.

Risk the May KC/Chicago wheat spread to a two-day close below -20 cents (premium CBOT wheat).

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