Wheat has two situations developing, completely opposite of each other.  First the bullish side …

Monday’s crop condition report showed 42% of the winter-wheat crop in good to excellent condition, down from 44% the week prior.  Three big producers came in well under the national average with number one wheat producer Kansas at 28%, Nebraska 36% and Oklahoma 36%, all at good to excellent condition. 

Failure to get needed rain would deteriorate the crop further dropping the ratings and create the potential for a short-covering rally.  Non-commercial funds are short 54,000 contracts with trend following funds short 82,000.  A continued drop in ratings could have these funds begin to panic out of short positions, rallying July wheat up a $1.00 to a $1.25. 

Now, the bearish side …

WXRISK.com, the AG weather site, is calling for substantial rains across the winter-wheat-belt states.  The 5-day forecast has 1-2 inches of rain fall with 70% coverage in the western plains.  The 10 day forecast, .5-2 inches, and the 15-day forecast another 1-2 inches.  These forecasts can change quickly, so we should stay focused on the next week.  Should these rains develop as called for, we could see a sharp increase in the crop condition ratings, which could mean the index funds holding long 122,000 contracts begin to liquidate as an improving crop rating would suggest higher yields, better protein, and bigger crop.  This would have us test 4.70 support, and then a bounce before taking it out. 

One or the other of these scenarios will come to play over the next 40 days.

The Trade

Those looking for a conservative play to the upside should consider the following trade.

  • Look at buying one of the December Chicago wheat 6.00 calls and selling two December wheat 7.00 calls for a purchase price of 5 cents or in cash value $250.00.
  • There are two risks on the trade with the first being the cost of the trade plus all commissions and fees.
  • The second is if all strikes finish in the money at option expiration in November, one carrying the position would be short a December futures contract at 7.00.
  • I will point out though in this scenario that being long one of the 6.00 calls and short one of the 7.00 calls would gross $5,000.00 at expiration.

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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.