Corn – Wheat Spread Might Narrow Down

Wheat Spread Might Narrow Down

Last year, there were a lot of speculations that because of the dry weather from the United States the wheat and corn production would be very low so the prices rallied to record highs. In the autumn of 2012 even though the yields were pretty low, the production was not that bad and prices started to fall. This year the production is estimated to be high. Each time prices go up; producers are planting more and more so the offer rises fast, while the demand remains constant. In these cases the price tends to fall.

corn wheat spread narrowing resize

Chart: Corn/Wheat, Daily

The prices of corn and wheat tend to be pretty good direct correlated. But sometimes happens that the prices start to diverge. This happened again during the past weeks. From 20th of September, the price of corn continued its down trend, while the price of wheat started a rally.

At this point there are some technical signals that corn might come back above 4.5$ per bushel. The positive divergence on the RSI signals a possible reversal, but from my experience, I would say that it will be helpful to see a close above 450.00 level. For the 2.4$ spread, between these two grains, to be covered we could also expect a fall of the price of wheat. The technical signal for this would be a drop under the local support, given by the latest low.

Using this divergence, traders could use a spread system and enter long corn and short wheat. A pretty used hedging system that could get a pretty interesting return for its user.

 

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