Gavin Maguire (December 14)
Many grain traders are creatures of habit, turning to a select
array of time-tested trading strategies at certain times of the
year, such as the corn versus soybeans trade early in the U.S.
spring planting season, and old-crop versus new-crop corn and
soybean spreads in the summer as both those crops begin their
key growth phases.
Another crowd pleaser is the corn-versus-wheat trade that plays
out over the opening weeks of the calendar year, and traditionally
involves wheat values eroding relative to corn as winter
wheat emerges from dormancy while corn begins to stake its
claim for increased acreage in the spring. That strategy could
well prove effective again in 2013, but has additional risk embedded
this time around given the poor condition of the latest
U.S. wheat crop that could help prices resist their traditional
New Year wilt.
FRIENDS OF THE TREND
One of the most alluring elements of the corn-versus-wheat
spread - especially the March corn versus March CBOT wheat
variety - has been its track record of narrowing steadily over the
first two months of the year. A similar pattern unfolds in the May
contracts, which capture more of the winter wheat crop’s emergence
period and also run into any early spring planting problems
that can serve to support corn values.
Offering additional appeal this time around is the prevailing low
level of U.S. and World corn inventories, which is expected to
firmly underpin corn values over the opening weeks of 2013 as
traders turn an eye toward U.S. planting prospects for the upcoming
For a graphic of the corn-wheat spread, seasonally, click here
SHORT WHEAT A RISKY BET
In order for the short wheat, long corn trade to be effective, the
short wheat leg requires that wheat values lose ground relative
to corn during the early New Year time slot.
But such a move may not materialize to the degree expected in
2013 given the prevailing concerns about the state of the U.S.
winter wheat crop, which has entered its winter dormancy phase
in the worst condition on record as parched soils across the
Central Plains deprived the crop of a chance to establish a
strong root system.
For a graphic of U.S. winter wheat crop ratings, click here
Changing global wheat balances also stand to impact the wheat
market in early 2013, as crop-threatening weather in key exporter
regions like Australia and Argentina are beginning to
prompt adjustments to output estimates from those areas.
Additional revisions to crop projections are likely in the weeks
ahead that could well set the stage for increased U.S. wheat
export potential in 2013 - irrespective of the state of the U.S.
crop as it rounds out its own growing season.
Should the U.S. wheat crop be found wanting in terms of quality
and quantity around that time, an upward bias to U.S. wheat
prices could well emerge, which would defy expectations for a
softening trend in the opening quarter of 2013.
So while traders may well be tempted to turn to their cornversus-
wheat trade right now as part of their year-end tradition,
there are reasons to take a more cautious approach this time
around, especially with regard to the short wheat leg of that trade.