I like to follow a few important spread trades in grain futures markets. Wheat/corn spreads are particularly fun to follow. Wheat is a food grain and generally trades at a healthy premium to corn. If cheap enough relative to corn, it can be fed to animals. Corn is a feed grain, but you could argue that today it is just as much a fuel grain. Harvest times differ too. The “gut slot” of the winter wheat harvest is in June, while the harvest of corn generally occurs in October.
Here’s an old favorite in the world of wheat/corn spreads: On or about June 1, buy December CBOT wheat futures and sell December corn futures. Exit the trade when the corn harvest begins in earnest (early October). Over the past 20 years, December wheat has gained on December corn in 15 years, by an average of 31 cents per bushel. By the way, the odds of success increase if the spread is less than 150 cents in early June, i.e., wheat is not “overpriced” relative to corn.
The accompanying chart shows the record for this year. On June 1, December CBOT wheat was trading at a 125 cent premium to December corn. Today it trades at a 250 cent premium – a mere $1.25 per bushel change in a spread relationship, in 8 weeks time!
Past performance is no guarantee of future results but, oh my.