Last Thursday’s weekly export sales report for wheat showed 115 thousand metric tons. That was old crop numbers with new crop numbers coming in at 142 thousand. Clearly demand is not a driving force and for months hasn’t been in wheat. Demand looks to remain weak until the new crop in the field shows its strength. The Monday’s crop condition report showed 45% of the crop in good to excellent condition. We need over 60% good to excellent condition to make us a primary port of origin for high quality milling wheat for human consumption. We have 30 days left to make or break this crop. The rally that started last Thursday through this past Monday of 69.4 cents cent rally was due to forecasts calling for up to 3 inches of rain falling in some areas in Kansas; our number one winter wheat producing state. This lends to thinking of ponding and pulling of land damaging the crop. However the real fear was a couple of forecasters calling for a possible frost or freeze by midweek that pushed us to close above the 5.05 resistance.
Weather Impact
Frost or freeze is far more serious than excessive rain as too much rain now can be offset by a stretch of sunny warm days whereas the frost or freeze burns the wheat and permanently damages the plant cutting yields and protein levels. When we began trading this week the market traded fear before fact trading the freeze potential. Should it be a genuine threat July’s wheat futures could potentially move quickly to 5.45 per bushel. A softening on this forecast and we pull back to 4.90. Keep in mind trend following funds are short 110 thousand contracts with non-reportable funds short 94 thousand contracts. Any fear of a broader base damage to this crop and we will take out 5.45 and move to 6.04 quickly on short covering by these funds.
Strategy
I would propose for a longer term trade that one buy the Dec Wheat 6.10 call and sell 2 December Wheat 7.00 calls for 4 cents or a cost of $200.00. There are two risks on this trade with the first being the cost of the trade plus all commissions and fees. The second risk is that if all options expire in the money at option expiration in November, one would be short a futures contract at the 7.00 price level basis December futures. In this scenario one would collect $4500.00 as the 6.10 call and 7.00 calls would expire in the money and exercise against each other collecting ninety cents.
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. Sign Up Now
