Rain, Rain Go Away
Fundamentals
Wheat futures have given back half of yesterday's gains on a stronger dollar and improved Australian crop outlook. Australia has seen good rains spread throughout the growing region since the start of the April-June winter crop planting season, which have lifted prospects. In the US, Wheat growers have also seen plenty of rain - in fact, too much rain. The heavy rains have interfered with seeding of the spring Wheat crop, with only 50 percent of the crop in the ground as of May 17th. This is well below the 5 year average of 90 percent. The rains have also created problems for the winter crop, as the downpours have caused an erosion of soil, killing some plants and opening the door for potential disease problems. Despite weakening demand for US Wheat, the price of the grain has risen my almost a dollar since mid-April. The move higher has been aided by a weaker US dollar and concern that inflation may soon be on the upswing again. Funds have had a sizable short position in Wheat, and inflation concerns have spooked some fund managers, causing them to lighten up on their positions, which has aided the rally. The fundamental outlook for Wheat can be seen as neutral to slightly bullish. The world crop outlook outside of the US has improved substantially, suggesting it may take additional crop damage in the US and further signs of inflation to sustain future rallies.
Trading Ideas
Both the fundamental outlook and technical picture remain somewhat neutral, with inklings of bullishness. The more conservative trader may choose to remain on the sidelines. However, the more aggressive trader worried about crop conditions and inflationary pressure may possibly wish to enter a bull call spread by buying the July Wheat 600 call and selling the July 650 call for a debit of 15 cents. The trader risks the initial investment of $750 for a potential profit of $1,750 if the July contract were to finish above 650 on the June 26th expiration date.
Technicals
The July Wheat chart shows the market remaining in a sideways channel between 500 and 600. Prices are currently testing relative highs from late January near the 600 mark. In order to show a breakout from the sideways channel, prices must rally beyond resistance at 600 and 645. Failure to close above 600 suggests the market will remain in its sideways channel. In the near-term, prices have pulled back to 570 only to rally, confirming near-term support at this level. Both Momentum and RSI are slightly negative, despite yesterday's up day, suggesting the possibility of near-term weakness.
Rob Kurzatkowski, Senior Commodity Analyst
