Exports account for nearly half of US wheat usage. Unfortunately the two largest importers of US wheat last year, Brazil and China, have severely reduced buying of US wheat. As a result, the US export commitment is the fourth lowest of the past ten years.

In addition, East Coast hog and poultry producers have begun importing UK and French feed wheat, reducing domestic feed demand. Although futures have advanced sharply over the past two months in anticipation of lower Russian crop potential next year and hopes of large Brazilian sales, both are “anticipatory” events and likely not to become a market factor this season.

Therefore, we expect futures to consolidate into the New Year. Because US wheat has been priced above other major foreign exporters, sales have lagged so far this season. The export commitment as of November 13 totaled only 595 million bushels compared to 802 million on the comparable date last year, down 26 percent

The supply/demand balance has changed very little over the past five months. Supplies are adequate, exports remain dismal, and feed use continues to appear overstated. However, feed use could increase as poultry producers have purchased a cargo of feed wheat from the UK and another cargo from France.

As a result, increased feed use of imported wheat does not change US ending stocks as usage is offset by greater imports. Talk of poor Russian winter wheat conditions, Russian saber rattling over Ukraine, minor reductions in Australian production, and some calling the Brazil wheat crop a disaster have all stimulated heavy fund buying of wheat in recent weeks. However, US, Chinese and Russian crops are now in dormancy and little new news of Northern Hemisphere crops will be market factors until next spring.

The Trade

Without any bullish news, look to sell rallies. I propose the following trade.

  • Look at buying the March Wheat 525 put for 9 cents or in cash value $450.00.
  • The risk on the trade is the price paid for the option plus all commissions and fees.
  • I look for March futures to eventually test down to the 5.20 level once again.

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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.