It took a $1.60 rally in wheat to get funds to cover their near record short position of 90 thousand contracts to now being long.  They covered their shorts on fear on several issues. Talk of continued drought in the western plains wheat states and potential shipping problems from monster world wheat shipper the Ukraine. 

Getting out of shorts on fear is over for the funds and to build a long position it will take adverse weather to ignite a rally. We know demand is weak and not a driving source. The short covering rally was all about supply side fundamentals. 

Crop condition reports this week lowered crop ratings in Texas, Colorado, Oklahoma, and Kansas, all key winter wheat states. As weather goes in these states, so goes the prices.  The common thinking is late March and April will continue to be dry.  This current week is dry but concern is over the cold temperatures.  The central plains could see temperatures at night in the teens.  In conclusion, the short covering rally is over. Going forward investors should in my view be trading the weather reports as they relate to early emergence and wheat condition.

Once winter wheat breaks dormancy and harvest begins, spring wheat planting will begin sometime in May with weather being the determinant. Since funds have covered their short positions what’s next for them.

With demand non-existent, the market eyes the Russian/Ukraine issue being the one geo-political event that can deter funds from re- establishing a short position.  Geo-political issues can emerge at any time and certainly will have investors buying the rumor and selling the fact. With global wheat supplies ample along with Canada’s last wheat harvest at record levels, it is my view that the price of wheat will retrace and that funds will revisit previous levels around 6.00.

TRADE IDEA

I therefore propose the following trade which is a position trade for the next few months. I propose buying the July Wheat $6.75 put and selling the July $5.75 put for 20 cents, or in cash value $1,000.00. The risk on the trade is the price paid for the spread plus all commissions and fees. The maximum one could collect is $5,000.00 if both strikes finished in the money at the time of expiration.

WEBINAR

For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 PM central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012.  If you cannot attend live, a recording will be sent to your email upon signup. Or please e-mail me anytime. 

RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.