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Home / Futures Blog / Wheat By Any Other Name…

Wheat By Any Other Name…

May 16, 2011 by John Payne

When it comes to trading wheat futures, it is paramount to know the types of wheat is out there and where to trade each variation.  As the summer begins to arrive along the southwestern plains, news continues to come out about the drought and hot temperatures there creating a poor quality crop.  The speculator in us all tells us to buy wheat as the supply coming online will be small and poor in quality.  We want to own what is scarce!

If this were corn or soybeans our strategy would be simple.  We would call our Daniels Trading broker and put in an order to buy Corn or Soybeans traded at the Chicago Board of Trade, the only domestic Corn or Bean futures contracts available.  When it comes to wheat futures, things aren’t as clear cut.  Wheat grown in the Western Plains is not the same wheat grown east of the Mississippi, and the prices will reflect that.  Each has different protein levels and is used in producing different end goods.  The supply and demand picture can be different as well.  So to potentially turn our inclinations into profits we need to make sure the instrument we are using is the correct and intended one.

There are three main types of tradable wheat with active, liquid futures contracts.  In this business each type is referred to by the city in which it is traded: Chicago Wheat (Soft Red Winter Wheat), Kansas City Wheat (Hard Red Winter Wheat), and Minneapolis Wheat (Hard Red Spring Wheat).  The classifications of “spring” and “winter” refer to the time of the year each are planted.

Kansas City Hard Winter Wheat

The most prevalent type of Wheat grown in the United States is the Hard Red Winter Wheat traded in Kansas City.  This Wheat is grown in Kansas, Texas, Oklahoma, and Nebraska.  The KC Wheat is used primarily in bread making and is widely used around the world.  KC Wheat represents half of the total domestic wheat production here in the US..  This type of wheat has a mid to high level of protein in it and can be used as a substitute for livestock feed if necessary.  It is in tight supply right now due to difficult growing conditions in the areas mentioned above.  The pit traded symbol for this type of wheat is KC, the Globex symbol is KE.

Chicago Soft Winter Wheat

Soft Red Winter wheat or Chicago Wheat is the most actively traded wheat contract and is traded at the Chicago Board of Trade.  When most people speak of wheat futures they are referring to this contract.  Chicago Wheat is mostly grown east of the Mississippi river in more humid environments.  Chicago Wheat is produced for its ability to be processed into flour.  It has light protein content and isn’t as good of a substitute for animal feed as other wheat and isn’t used in much bread either.  We typically find this type of wheat in our cakes and sweet flour based snacks.  The Pit symbol for CBOT wheat is W, and the Globex symbol is ZW.

Minneapolis Hard Spring Wheat

The third and least traded type of wheat futures contract is the Hard Red Spring wheat traded on the Minneapolis Grain Exchange.  Minneapolis Wheat is grown in the Dakotas, Montana, Wyoming, and Idaho.  It is typically the heartiest wheat available.  Due to its high protein content it is used in bread making and is a competent substitute for animal feed.  This crop is typically the last wheat crop to go into the ground due to its northern locale.  It is also the least traded of the three wheat contracts and in times of tight supply has seen the most volatile of price movements.  The pit symbol for “Minny” Wheat is MW, the electronically traded symbol is MWE.

There is a Difference

So now that we are aware of the different wheat contracts it is important to differentiate between them when constructing trade ideas.  If one is looking to just get long wheat, it might be a good idea to take a look at each crop individually to see which is more susceptible to market movements.  Spreading (ex.  Buying KC Wheat /Selling Chicago Wheat) is an effective way to isolate a certain crop and protect against outside market volatility.  The KC/Chicago example has been effective of late, the drought in the KC Wheat crop (Dec) has added close to an 80cent premium ($4000 per contract) over the Chicago wheat (Dec) in recent months.  So ,if a trader saw that the weather in the pan handle of Texas was getting worse and wanted to buy wheat to profit from crop destruction it would behoove them to look and see what type of wheat is grown in that area and where it is traded.  If they saw that the KC Wheat was grown there and placed a buy order on KC Wheat rather than the Chicago wheat the profits would have been greater.  It pays to know!

Whatever the strategy, it’s vital to know not all wheat is the same and needs to be differentiated when being traded.  If you have any questions on wheat and how you can potentially profit from it contact your Daniels Trading broker for assistance and trade ideas.

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Risk Disclosure

STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION.

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

Filed Under: This Week In Grain

About John Payne

John Payne is a Senior Futures & Options Broker and Market Strategist with Daniels Trading. He is the publisher of the grain focused newsletter called This Week in Grain, along with being a co-editor of Andy Daniels’s newsletter, Grain Analyst. He has been working as a series 3 registered broker since 2008.

John graduated from the University of Iowa with a degree in economics. After school, John embarked on a 4 year career with the United States Navy. It was during two tours in Iraq and the Persian Gulf where John realized how important commodities are to the survival of society as we know it. It was this understanding that brought about John’s curiosity in commodities. Upon his honorable discharge in 2007, John’s intense interest in the world of commodities inspired him to move to Chicago and pursue his passion in a career in the futures arena.

After a three year position with a managed futures firm specialized in livestock trading, he was given the opportunity to join the team at Daniels Trading. Being in the business and seeing how other IB’s operated, it was the integrity and straightforward approach of the Daniels management team and brokers that attracted him to make the move. Since joining Daniels, John has broadened his fundamental and technical analysis of the markets even further. John has been writing his newsletter This Week in Grain under the Daniels banner since 2011.

Working in high pressure industries like the military and capital markets, John has learned the value of preparation in times of stress. He believes that instilling within his clients the value of a good plan and a cool head for dealing with the day to day swings of commodity markets. He treats every client as a teammate, understanding that his job is to help clients achieve their goals, whatever they may be.

John is a proud supporter of the Iraq and Afghanistan Veterans of America, the Veterans of Foreign Wars and the National Corn Growers Association. When he is not working, he enjoys athletics of all kinds and spending time with his wife and their two kids.

John’s commentary is featured in the following publications:

* All Ag Radio – Sirius Channel 80
* AM 880 KRVN – Lexington, Nebraska
* RFD TV
* Wall Street Journal
* Barron’s
* China News Daily (English version)

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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