Wheat Prices Continue to Grind Lower
Fundamentals
Wheat futures have been on a steady price decline as the market attempts to digest higher world supplies this year. The USDA is its August Crop production report, estimated that the U.S. fall Winter Wheat crop would total 1.537 billion bushels, up from their 1.525 billion bushel estimate in the July report. This increase was also reflected in the 2009-10 carryout estimates which the USDA raised to 743 million bushels, up 37 million bushels from July. World Wheat production also increased this year, causing the USDA to revise upward the world carryout total to 183.56 million metric tons. This bearish news comes at a traditionally weak time for Wheat prices, as the U.S. harvest is being completed. However, U.S. producers may be reluctant sell their current harvest right away, given sharply lower cash market prices. Low Wheat prices may also affect the number of acres planted to Winter Wheat this upcoming season, especially in more marginal Soft Red Winter Wheat growing areas in the mid-southern states like Missouri, Tennessee, and Arkansas, where the cash basis has been running almost one dollar below futures. U.S. Wheat exports have been steady, with recent tenders coming from Egypt and Japan. However the wild card could be India, which is suffering from rising food prices due to below normal monsoon rains this year. Although India's wheat supplies seem adequate, it appears that they will not be exporting Wheat as earlier feared.
Trading Ideas
With Wheat prices hovering near contract lows and the harvest nearing completion, it is possible that the seasonal lows in Wheat might be near. Those traders looking for a possible rebound in Wheat prices may want to possibly consider purchasing call options in the winter trading months. An example of such a trade would be to buy a December Wheat 530 call. With December Wheat trading at 499 ½ as of this writing, the 530 calls could be purchased for about 21 cents, or $1050 per contract, not including commissions. The premium paid is the maximum risk on the trade. In this case, with the option purchased for 21 cents, the trade will be profitable at expiration if December Wheat is trading above 551.
Technicals
Looking at the daily chart for December Wheat, we notice that the downtrend in place since the June highs is still firmly intact. There was only a brief period in early August where prices moved above the 20-day moving average, but that move drew nothing but eager sellers looking for a rally to sell into. It will take a move above the current trendline to get bulls more excited about the Wheat market. The 14-day RSI has reached oversold territory with a current reading of 27.83. 475.00 is seen as support for December Wheat, with resistance found at the downtrend line currently near the 544.00 area.
Mike Zarembski, Senior Commodity Analyst
