Wheat’s collapse in the last two weeks to new ten year lows comes on abundant supply amid lack of consistent demand. This is nothing new for market participants as optimal weather and growing crop sizes from major producers aside from France and Germany have bested expectations. After closing lower in eight straight sessions, the market finally looks light it may have found a near term bottom amid short covering. Egypt’s prime minister said the country will try to stick to the ergot fungus ban while noting an abundance of supply. This is a similar tactic that China employs in the corn and bean market when they are trying to artificially drive prices lower. Analysts for now are discounting this possibility as the trade sees number one world buyer Egypt coming back into the market to secure 10-12 million metric tonnes. Export sales though in the U.S. disappointed this week at just 279,400 metric tonnes. Sales are still running slightly behind the USDA forecast as cumulative sales stand at 45.8 percent vs. the five year average at 46 percent. There was some bullish news in the market as talk of India sourcing Ukrainian wheat amid a tightening balance sheet, and also talk that India may eliminate its 25% import tariff to aid domestic millers. India has not participated in the world market in bulk in a number of years, and along with a lack of quality improvement in Northern Europe, global wheat trade looks to pick up in the months ahead. Russia has moved to officially eliminate its wheat export tariff through July of 2018. But, again, Russian exports above 25-26 MMTs will hinge more upon capacity than market factors. Recall late-harvest yield estimates in Russia have been in retreat.
Managed funds look to have extended their short position as of this week at over 120K contracts which is near a record. Those looking for a short covering rally may consider the following trade. Look at buying the Dec Wheat 425 call while selling two of the 360 puts for three cents or better. I look for wheat to rally into winter wheat planting season down the road and the uncertainties that brings which could incur some short covering by an extended short position in the market.
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.
