There are both technical and fundamental reasons that wheat will continue to trade higher.
In my opinion, exports to Brazil look to increase measurably as their main supplier Argentina suffers from drought and of course their recent frost has cut into harvest hopes. Traders are concerned that adverse weather again may trigger the second Argentine wheat export embargo in two years.
Wheat prices in China are at record high levels suggesting they look to continue to be an aggressive U.S. wheat buyer at cheaper value. The Ukraine grain lobby indicates that relentless rains may reduce winter wheat plantings by about 30%. Additionally, Australia’s weekend weather forecasts call for significant frost in the New South Wales wheat grain belt with temperatures hitting below zero this past Friday and Saturday. There’s no major or single event that’s fueling the wheat rally but a series of bullish news events around the world from lower protein levels from post harvest results.
Current planting problems of this year’s winter wheat crop in the European Union and Black Sea region, to frost, freeze and drought of one level or another. This looks to continue to have trend following funds, once holding a near record short position to continue to buy out of the short positions that could take prices higher. Technical swing numbers for the remainder of the week come in as follows. Support for December futures sits down at 680, with resistance is at 7.04 and then 7.30. If we see the market pull back to the 680 levels and hold, I would propose the following trade.
Provided we see a pullback in March futures in wheat back to the 690.0 level, I propose buying the March wheat 750 call and sell the 850 call for 12 cents or a $600.00 cost. The risk on the trade is the price paid for the spread plus all commissions and fees.
The maximum one could collect is $5,000.00, minus the price paid for the spread and any commissions and fees. If one looks at the chart and notices the move made back in June 2012, the funds were short 87,000 contracts, and the market rallied almost $2.00 in two months. I am by no means saying that that will happen again, but market trends and reactions do reemerge when talking commodities in my opinion. I believe that it is important to know where the funds are positioned especially when trading grains.
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.
