Drought Hurting HRW Crop... But We All Know That, Right?

For some time now, I have been very cautious about shorting KC wheat because of the very poor crop ratings and the likelihood of a very small harvest of Hard Red Winter Wheat that is the basis for the KC wheat futures contract. While I am still very cautious, I am beginning to think that the small crop has been factored into the price with KC futures at a huge $1.40 premium to CBOT's soft wheat futures. Sure, the drought could continue affect the KC future's crop, but it's a big world and US weather may not be the biggest driver.

Also, as I have mentioned in the past, the July KC contract also has some big negative factors to bear in mind. The full effect of the contract spec changes coming into force September 1 has possibly not been taken into account by many traders. Since only a tiny fraction of traders ever take delivery, most do not think the underlying specifications will matter much to them. However, the contract may ultimately (or quickly) gravitate to the value where buyers will actually take wheat that cannot satisfy the September specs.