Wheat’s strong surge higher to end last week comes on two fronts. First a jump in global buying on the world market especially from number one world buyer Egypt has rekindled thoughts of U.S. wheat becoming more competitive. Second from a technical perspective, December wheat futures closed above the 50 day moving average Thursday (10/14) at 412.4 for the first time since June 20th. Normally this wouldn’t be a major story. However the wheat market has had an extended managed money short position in it for a while at 151 thousand contracts. Consecutive closes above this average as we had to finish the week Friday could ignite more short covering by the funds.
Fundamentally, global buyers are finally active securing U.S. offers amid historically low prices. Late Thursday Egypt bought 60,000 tonnes of Russian wheat while securing another 120K tonnes from Romania. The amounts weren’t the story as much as the price was as it came in nearly $10 per metric ton higher than the tender two months prior. Saudi Arabia is said to be seeking 595,000 tons of hard red wheat while Syria is said to have bought over a million metric tons from Russia. Algeria is said to have secured 450-500K metric tons from the U.S.
However, it was a losing offer, of U.S. hard red winter wheat, that attracted more market attention at the latest tender. The cargo, tendered by Louis Dreyfus, was priced at $173.98 a tonne, some $4 a tonne below the cheapest offer of Russian wheat (also from Louis Dreyfus), and $6 a tonne below the winning Romanian bid. While the U.S. cargo was disqualified for being of a higher protein grade not matching the tender’s specifications, the low price, for a higher specification wheat, surprised traders and fuelled a 5 percent two day surge in Chicago wheat futures, the world benchmark. Simply put if U.S. wheat becomes more competitive on the world market with consecutive weekly offers, the lows are in for some time in my view. Look to buy dips carefully next week just above the 50 day moving average basis December for an aggressive trade to catch more short covering in the days and weeks ahead. Aggressive option traders can look to buy the March 2017 460 call while selling 2 of the March 17 400 puts for even money.
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.
