Kansas City/Chicago Wheat Spread: Roll to July

Thinking of Summer

Well, boys and girls, next week is the First Notice Day for the May grain contracts.  Unless you actually want to take delivery of this stuff, it’s time to roll out to the summer contracts.

The blog is holding a hypothetical long position in the May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat) on November 30th.

Several months into this trade, the Kansas City wheat is still priced at a discount to the Chicago wheat.  This is unusual because the KC wheat is a better grade than the CBOT wheat.  Therefore, we will side with history and continue to favor a return to the KC wheat having the premium.

May Kansas City Chicago Wheat spread daily

May Kansas City/Chicago Wheat spread daily

In the past, inversions in the KC/Chicago wheat spread have been followed by the KC wheat reaching a 35-40 cent premium over CBOT wheat.  So if the July KC/Chicago wheat clears the March high we may look to increase the size of the long position.

Conversely, the July spread just fractionally broke the similar lows from November and February.  If the July spread continues to edge lower, it could have a clean shot at a return to the nearest-futures November low of -40 1/4 cents (premium CBOT wheat).  In light of this, we’re going to use a short leash on the July spread.  If we get knocked out, we can simply watch for a setup to reenter.

Trade Strategy:

On the long May KC/Chicago wheat spread that was entered at the equivalent of at -3/4 cents (premium CBOT wheat), roll to the July contracts at the market-on-close on Friday, April 22nd.  Risk the July spread to a two-day close below -13 cents (premium CBOT wheat).

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