Last month we did a trade where we bought December wheat and sold December corn as a spread. Earlier this summer wheat was trading more than $2.00 over corn. Traditionally the corn, wheat, beans Ratio was a 1-2-3 proposition, meaning if corn was at $4.00, wheat would be $8.00 and beans $12.00. As many commodities have soared during the past 5 years, this has turned more into a 1 – 1 ½ - 2 ratio so if corn is $6.00, what would be $9.00, and beans $12.00. The corn and bean part are close with corn at 6.40, and beans at 12.46. The aberration here is wheat, trading at 6.26 currently, or 17 cents under corn. In September many of you did this trade and bought wheat and sold corn when corn was actually 20 cents over wheat. The wheat did gain on corn and went to 30 cents over corn, a 50 cent gain. Some exited the trade and others held on as this spread was well over $2.00 wheat above corn this summer. See daily and weekly charts below. The spread moved back to corn 20 cents over wheat this week and has held there. I do expect this action to continue where wheat gains on corn. The reason is not only technical as evidenced by the chart but fundamentally, when wheat is below corn, livestock producers can use wheat as feed as it has much more protein for the animals. This increased demand also supports this trade. Additionally, we do not have to necessarily pick a direction for wheat or corn, we merely need wheat prices to gain on corn. The spread is currently corn 16 cents over wheat. If it went to wheat 30 over corn again that 46 cents would be, at $50 per cent on a 5000 bushel contract, $2300 for the full size and $460 per spread for the minis which are 1000 bushels and $10 each cent. Margins are low compared to most futures contract and as stated, the direction doesn’t matter.

The Trade: Buy December wheat and sell December corn at Market

Daily spread chart

width=630