Wheat export sales for last week came in at 274 thousand metric tons down 3% from the four week average. Sales were largely low quality feed wheat to countries like the Philippines who came in for 158 thousand, Italy 130, Ecuador 27, and Cyprus 23. There were multiple port switches, reductions, and decreases. Clearly demand is not a driving force for wheat. Bearish news comes from countries who sell their wheat cheaper than the U.S. This includes Russian and French wheat, along with almost all of the European Union. But all is not lost from Tuesday’s USDA crop report for long term wheat trends where weather will be the driving force for pricing.
Tuesday’s USDA crop report showed total wheat seeding at 36.609 million acres down from 39.461 a year ago. This is the lowest in 6 years. The breakdown showed hard red winter wheat at 26.500 million planted acres down from 28.900, which was the lowest in nearly 30 years. So why didn’t the wheat market rally after the report? When it comes to wheat, it is quality and not quantity that determines value. It is the exact opposite for corn, where a good percentage of it is grown for animal consumption, where quantity determines value not quality. Millers of wheat need wheat high enough in protein and quality to produce human foods such as pastas and breads before processing. After processing, millers can fortify the wheat, but there are limits to fortification. Wheat not high enough in protein falls into the feed category and is general sold at a discount to imports who only buy hand to mouth as needed.
Even though this year’s acres planted are smaller, weather could bring sunny warm days and timely rains, leaving quality levels high enough to make the U.S. a primary port of origin for wheat which would drive prices higher. Failure of weather to cooperate, and we will produce lower quality levels which means lower export levels and lower prices. The wheat market looks at weather now as a primary pricing source here in the U.S., Europe, and the Ukraine. Wheat will break dormancy in late March/ early April before we enter into the May and June harvest time. Currently the European Union and Russian territories lack adequate snow cover and moisture. A period of freezing temperatures can damage the young wheat seedlings. The charts will reflect weathers direction. March wheat has resistance at 4.81 and support at 4.40. A close over 4.81 sets up 5.00 then 5.34.
To take advantage of either a bullish or bearish weather scenario over the next month, I propose the following trade. Look at buying the March Wheat 5.00 call while buying the March wheat 450 put for a combined purchase price of 7 cents, which in cash value is $350.00. The risk on the trade is the price paid for the spread plus all commissions and fees.
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. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup. Or please contact me at any time at email@example.com
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.