Rain in the Plains is keeping producers from harvesting grain
Fundamentals
There certainly has been no shortage of moisture this spring in the southern regions of the Great Plains -- the heart of the U.S. hard red winter wheat production area. The USDA weekly crop progress report released this past Monday showed the combined winter wheat harvest was 17% complete so far this season, up 2% from this time last year but below the 10-year average of 27% completed. The rainy weather has caused a slight decline in the quality of the crop still in the ground with the winter wheat crop now rated 65% good to excellent, down 1% from the previous week. However, the wheat that has been harvested looks to be of good quality and yield reports are coming in average or above. The entire grain complex has received a boost of late due to concerns about this year's production out of Canada, as heavy rainfall has plantings way behind schedule, and there are even concerns that a good portion of the crops may not get planted at all this season. These concerns have spurred a significant rally in canola, oats and spring wheat futures, as these commodities would be most affected by any planting reductions. Outside North America, wheat production and supplies look robust. Wheat supplies in Australia, the world's fourth largest exporter, total 11.15 million metric tons, up from just over 8.7 million tons last year. Though mother nature is not cooperating with the wheat harvest now, eventually the U.S. crop will be harvested, and unless we start to see improved export demand or major production declines from non- U.S. wheat growers, hedge selling pressure may overwhelm recent speculative buying , putting the recent wheat price rally in jeopardy.
Trading Ideas
Since making contract lows just above the 440.00 level earlier this month, September Chicago wheat has rallied over 40 cents per bushel, mainly due to crop concerns in Canada, as well as harvest delays in Kansas and Oklahoma. However, given the huge surplus of wheat worldwide, producers may look at any rally attempts as a reason to sell to lock in prices as the harvest progresses. Those traders looking for Chicago wheat prices to fall could investigate bearish trading strategies to take advantage of a decline in wheat prices. An example of such a trade is buying a bear put spread in Chicago wheat options. For example, a trader could purchase a September Chicago wheat 460 put and sell a 410 put. With September wheat trading at 473.25 as of this writing, this spread could be purchased for about 16.50 cents or $825 per spread, not including commissions. The premium paid is the maximum risk on the trade with a potential profit of $2500 minus the premium paid, which would be realized at expiration should September wheat be trading below 410.00 at option expiration in August.
Technicals
Looking at the daily chart for September Chicago wheat, we notice price struggling to hold above the 20-day moving average. Though a move through this technical indicator could spur fresh buying from short-term momentum traders, it appears that momentum buying has been met by hedge selling, as producers take advantage of the rally to initiate selling hedges during the harvest. The 100-day moving average remains well above the current price, coming in just above the 500.00 area. It would take a close above this level to put wheat bulls back in charge. The 14-day RSI is in neutral territory with a current reading of 51.64. The next major resistance point is found at the May 28th highs at 495.00. Major support is found at the contract lows of 442.50.
Mike Zarembski, Senior Commodity Analyst
