Wheat futures nosedived after the USDA showed that planting intentions were higher than expected. The report indicates that seeding will be 53.8 million acres, higher than the consensus estimate of 53.3 million acres. The front month May contract fell by over 20 cents as a result of the news, indicating the many traders' personal expectations may have been lower than the analysts' figures. The showing could have been much worse if the Dollar Index had posted gains. The index was down 53 points as of the grain market close. Adding to the bearish plantings data, stockpiles of harvested Wheat were up over 30% versus last year. The poor demand for exports could result in even larger gains over last year's levels, creating a glut. The relative stability of the US Dollar has made exports from competitive nations such as Russia and Argentina much more attractive to trade partners. At this point, it looks as though the only factors that could help shift the fundamental landscape for Wheat would be a rapid decline in the exchange rate of the greenback or inclement weather. A sharp Dollar devaluation is an unlikely proposition, given the crisis in Greece, which could keep the value of the Euro in check.
Both the fundamental and technical outlooks paint a negative view of the Wheat market in the near-term. We are, however, entering into the early part of the growing season, so weather factors will begin to play a much larger role in the market. There is little news out there at the moment to shift traders' opinions on the grain. Given the fact that prices are approaching critical multi-year support levels, some traders may wish to take a cautiously bearish approach to the market with limited risk potential. One such strategy would be a bear put spread, buying the May Wheat 450 put (WK0450P) and selling the May 430 put (WK0430P) for a debit of 7.0, or $350. The spread risks the initial investment for a potential profit of $650.
Turning to the chart, we see prices violating near-term support at the 465 level, and many traders may have their sights set on multi-year lows at the 440 level. If the 440 level is breached, the next area of significant support comes in at 410. The 14-day RSI is at oversold levels at 31.63, which could take the teeth out of a possible continuation of the sell-off. Also, the momentum indicator fell less sharply than prices, hinting that the market may find at least temporary relief.
Robert Kurzatkowski, Senior Commodity Analyst