Bulls Currently Showing No Love for Wheat Futures
Fundamentals
Wheat futures are the “forgotten” grain contract of late, as traders focus their attention on Corn and Soybeans as we enter the heart of the growing season in the U.S. However, those who have been following the Wheat market have witnessed a classic bear market. Since the beginning of June, December Wheat futures have fallen nearly $2 per bushel, as the Winter Wheat harvest has moved forward and U.S. crop estimates have increased. On Friday, the USDA released its July Crop Production and Supply/Demand reports, which both showed an increase in Wheat production and carryout totals. The USDA estimates U.S. Wheat production at 2.112 billion bushels, up nearly 100 million bushels from the June report and just above average analyst estimates. The USDA also raised 2009-10 U.S. carryout totals to 706 million bushels, which is up 59 million bushels. However, world Wheat ending stocks estimates were lowered to 181.3 million tons, as world usage was increased. Dry weather in Argentina has curtailed the Wheat crop there, with estimates falling to 9.5 million tons, down 1.5 million tons from last month’s estimates. Australia, on the other hand, is gearing-up for what some analysts believe may be record wheat production, as heavy rainfall so far appears to have broken the severe drought conditions in this major Wheat exporting nation. The recent sell-off in Wheat prices has made U.S. Wheat more competitive in the world market, and should the U.S. Dollar begin to weaken further, it would not be a surprise to see U.S. exports jump in the 3rd and 4th quarters of 2009. If true, then we may be seeing the seasonal lows in Wheat futures occurring in the very near future.
Trading Ideas
Given that winter Wheat futures typically make their seasonal lows just after the harvest and the potential for a near record Corn crop this season, some traders may wish to investigate Wheat/Corn Spreads. An example of such a spread trade would be buying December Chicago Wheat and Selling December Corn. As of this writing, December Wheat is trading at a $2.11 premium to December Corn. Those choosing to hold this spread would want to see the price differential widen. Because you cannot place a “stop order” directly on this spread, traders would need to monitor the position closely, as this spread could become potentially volatile as the Corn growing season progresses.
Technicals
Looking at the daily chart for December Wheat, we notice the market has begun to move sideways after the relentless 6-week sell-off which began in early June. The 14-day RSI continues to remain in oversold territory, but off the worst levels seen this week. Prices still remain well-below both the 20 and 100-day moving averages, which favors the bear camp, but there has been an increase in volume on up-days this past week. The Commitment of Traders report shows commercials increasing their long position in Wheat futures as of June 30th. Large speculative accounts are holding a small net-long position, with small speculators starting to cut-back on their net-short positions. Should Wheat prices show signs of a bottom, we could see a heavy bout of buying by these small speculators as their buy stops get triggered. Support for December Wheat is seen at last Tuesday’s lows of 538.00, with resistance found at the 20-day moving average near the 578.00 area.
Mike Zarembski, Senior Commodity Analyst
