Wheat recovered nicely Friday (7/22), and Monday (7/25) posting solid gains amid poor harvest results so far in France and parts of the European Union. However a turnaround Tuesday buoyed by hopes of record Russian Production in the post Soviet era halted the two session rally as once again both Chicago and K.C. futures couldn’t hold any rally much less the 4.50 level. The situation is worth following as non commercial and non reportable funds entered this week short over 100K Chicago wheat contracts. The E.U. is the second biggest net exporter of wheat and quality and condition issues have spurred a rally in Paris futures of about 13 percent for the month. Also of note, Argentina’s wheat production will increase in 2016-17, but not by as much as had been thought. The U.S. Department of Agriculture cut production to 13.7m tonnes their harvest forecast. The downgrade, to a figure 1.3m tonnes below the official USDA forecast restated last week, reflected lower expectations for sowings, which are being held up by “unusually wet conditions” in key central Argentine growing areas, the bureau said. Argentine farmers had been expected to ramp up wheat output to the highest in five years or more in 2016-17, lifting export prospects too, thanks to the greater incentive to sow the grain provided by the ditching by the country’s new government of export taxes and quotas on the grain. The question moving forward will be will Russian and Black Sea harvests which appear to be more than ample make up for the shortfall in the EU and Argentina? Or will it make U.S. wheat more competitive for global business particularly from number one world buyer Egypt. With both K.C. (hard red) futures and Chicago (soft red) both sitting under 4.50 per bushel on the board basis December, the low price could attract more buying since multi year lows for both contracts were achieved just this week for Chicago and earlier in the month for K.C. Volume declined on the last two price breaks to the low 4.30’s signaling the lows could be in for a while near term. Should these lows hold on the charts, look to be a buyer. Should funds look to cover their massive short position on the Chicago contract, a 50 percent Fibonacci retracement comes in at 4.90 December futures which would be a near term target to the upside.
With the excess of wheat stocks around the world that has been aided by the bumper crop just harvested here in the states, it’s been difficult to give the funds a reason to liquidate their short positions and cover a good percentage of them. There’s more than enough supply to meet demand. However much of this has been priced into the market leaving these bullish snippets from the EU and Argentina, urging some weak shorts to cover. Those looking for a bullish and bearish play may consider the following. Look to buy one of the Dec 16 490 calls while selling 2 Dec wheat 390 puts for a collection of 5 cents, or in cash value $250.00 minus all commissions and fees. (Spread currently trading at a two cent debit). For a little insurance or downside exposure, look at buying the Dec 16 wheat 4.00 put while selling 2 Dec 16 wheat 6.00 calls for even money. These options ratios can be packaged for a collection of five cents minus all commissions and fees. I strongly urge that you contact me to discuss strategy should you take this recommendation.
For those interested I hold a weekly grain webinar each Thursday at 3pm. It is free for anyone who wants to sign up and link for sign up is below. If you cannot attend live a recording will be sent to your email upon signup.
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.
