Thursday’s weekly export sales report showed 397-thousand metric tons of wheat was sold last week, down 27% from the week prior.  Key world buyer Egypt purchased 300-thousand metric tons from France and Romania this week.  The United States still remains a third or fourth port of origin for wheat for human consumption.  Asian countries were the main buyers in purchasing wheat at a discount for the feed ration.  Getting attention was the state-by-state crop condition reports.  Our number one winter-wheat producing state, Kansas, came in at 46% good to excellent condition, down 3% in the month of January.  Oklahoma came in at 41%, down 13% and Colorado 38%, down 24% in the month of January.  With February being a short month, and our winter-wheat crop breaking dormancy in March, supply-side fundamental news will begin to move to the forefront of futures pricing.

The February USDA crop report cut its 2014/15 US wheat-export estimate by 25 million bushels, to just 900 million bushels based on the slow pace of US wheat sales and loading. WASDE also cut US wheat imports by 20 Mil Bu to 160 Mil Bu to account for the slower inflow of wheat from Canada. Total 2015/16 US wheat-ending stocks at 692 Mil Bu and a stocks/use ratio of 33% argue for a potential low in March Chicago wheat of $4.70-4.90.  2014/15 world wheat-ending stocks rose to 197.85 million metric tons, up 1.85 MMTs from January and the largest stocks total in years. WASDE has been raising its world end-stock total going back to November. WASDE left 2014/15 Russian wheat exports at 20 MMTs. Russia has already shipped out an estimated 18.5 MMTs.

Taking this all into account, I surmise either two things will happen concerning the wheat market going forward. First, it is my opinion that May futures will either make new multi-month lows, trading down to the 4.75-4.50 range, or due to adverse weather, when the crop breaks dormancy in March, a rally will occur that takes May futures up to the 5.75-6.00 level.

The Trade

  • Those looking for a conservative way to enter the market might want to look at using an options strangle.
  • I propose buying the May Wheat 4.50 put and at the same time buying the May Wheat 6.00 put for a purchase price of seven cents or in cash value, $350.00.
  • The risk on the trade is the price paid for the option strangle, plus all commissions and fees.

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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.