No Retreat for Wheat Prices
Fundamentals
Not to be outdone by its corn and soybean brethren, Wheat futures have moved solidly into the bullish camp, as a weak U.S. Dollar, less than ideal weather conditions, and fresh speculative buying have all factored into the price rise. The decline in the greenback is normally considered bullish for commodity prices -- especially grains -- as U.S. exports tend to increase to non-dollar buyers. This year, Mother Nature has not been kind to Wheat producers, as unusually wet weather has put planting behind schedule, particularly for Spring Wheat. In North Dakota, the largest Spring Wheat state, producers have planted only 69% of the crop so far, down sharply from the average near 94%. This has led some analysts to lower their forecast for Spring Wheat as growers switch to other crops such as Soybeans. Quality of the Winter Wheat crop slipped a bit last week, with the USDA reporting 45% of the crop in good to excellent condition, down 3% from the prior week, with Kansas and Nebraska reporting 7 and 8 percent declines respectively. With the Wheat harvest getting under way, producers need to see dryer weather forecasts in order to get into the fields. None of this has been lost on large speculators who are beginning to accumulate a net-long position in all Wheat classes. The most recent Commitment of Traders report showed large non-commercials adding a cumulative 3,465 net-long contracts for the week ending May 19th. This has raised the cumulative net-long position to 43,964 contracts, the largest position being in the Kansas City Hard Red Winter Wheat contracts. Ironically, small speculative accounts are net-short Wheat futures and may spark an additional rally should short-covering buying emerge just above the recent highs.
Trading Ideas
Those traders who believe that the Wheat rally still has some legs might possibly wish to consider option strategies to help take advantage of the current trend. An example of such a trade would be a bull call spread in the September Chicago Wheat futures consisting of buying a September 650 call and selling a 750 call. With September Wheat trading at 645 as of this writing, the spread could be purchased for 31 cents or $1550 per spread plus commissions. The premium paid is the maximum risk on this trade, with a potential profit of $5000 minus the premium paid if September Wheat is trading above 750.00 at expiration in August.
Technicals
Looking at the daily chart for September Wheat, we notice the rounded bottom pattern that formed throughout most of the month of April. Prices accelerated to the upside once the recent highs of 607.00 were taken out. The 20-day moving average has crossed above the 100-day MA last week, adding to the bullish momentum. The 14-day RSI is approaching overbought territory with a current reading of 69.21. The next resistance point for September Wheat is found at 660.00, with support seen at the recent lows made on May 19th at 590.50.
Mike Zarembski, Senior Commodity Analyst
