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When Life Gives You Wheat... You Make Bread

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There is an interesting and rather profound dynamic at work in the US wheat complex that has inter-wheat spreads (Kansas City, Chicago, and Minneapolis varieties) turned a bit on their heads. With higher quality / protein varieties at a discount in price to the larger (more liquidity) Chicago contract. This could be attributed directly to the higher commercial storage rate set at the exchange (and used in cost of carry calculations by spread traders) which is dictated by the VSR (variable storage rate). With KC wheat costing conceivable more to store, a natural arbitrage will occur between the two contracts, as some traders will seek the lower cost of carry the Chicago contract provides. In a market where prices are not improving, reducing the cost to carry the commodity is one of the most direct ways to improve your bottom line. Add on the fact that the KC contract is deliverable against the Chicago (and not the other way around), and there are now two methods for this arbitrage to occur.
The wild card in this equation is the VSR for wheat (Chicago and Kansas City) as set by the exchange. This storage rate shifts relative to where spreads are trading to their calculated market carry, and this shift can sometimes forecast what future contracts may be considering...

Dan's full "Spread Outlook" is available for download, including an indepth look into the most liquid spreads and market conditions that might present opportunities for spreading! Complete with charts and cost of carry calculations!

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About the author

Dan began his career in 2006 as an arbitrage and clearing clerk for Spyglass Options in the Eurodollar futures options pit on the floor of the Chicago Mercantile Exchange. Taking his employing brokers advice, Dan soon left the floor to pursue a career “behind the screens upstairs”, as there was an inherent lack of opportunity for market making in open outcry pits. After graduating from the University of Notre Dame in 2009 (and for the subsequent 10 years), Dan leveraged his IT background in networking and computer programing to begin developing computerized trading algorithms and trading systems for multiple private equity firms and his own account. He eventually found his specialization in trading carry trade dynamics in currency and interest rate futures; while simultaneously building his experience in trading both inter-market and intra-market spreads. His trading experience later expanded to include most commodity spreads, with an emphasis on carry trade economics in agricultural commodities. In 2016 Dan decided to take his career full circle by becoming a series 3 and 34 licensed broker; and expanded his outreach to the agriculture production community. In 2018, he joined Zaner Financial Services Ag Hedge division, bringing his knowledge and expertise of carry trade economics and continues expanding exposure to spread markets. Dan can be reached at (312)277-0110 by phone, @DanielHusseyJr on twitter, and emailed at
Contributing author since 2/15/2019 

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