Bears Eating Shredded Wheat!
Fundamentals
Wheat futures have awakened out of their slumber the past several sessions and staged a surprise contra-seasonal rally, as traders shifted their focus to the east and the condition of the crops in Europe and the Black Sea region. Parts of the Ukraine have been deluged with heavy rain, which has hampered the wheat harvest for this major grain exporter. Other parts of the region including Russia have suffered under dry conditions. Any signs of significant crop losses in this region could help U.S. Wheat exports, as a major competitor could be taken out of the market. Here in the U.S., traders are gearing-up for the USDA crop production and supply/demand report to be released at 7:30 am this morning. Many traders are looking for a modest increase of nearly 100 million bushels for "All Wheat" production to nearly 2.165 billion bushels. Also of interest to traders will be the USDA's estimate for U.S. Wheat exports, especially given the potential crop problems in Europe and Canada due to heavy rains. A look at the most recent Commitment of Traders report shows both large and small speculative accounts net-short Chicago soft-red winter wheat futures, with a combined net-short position of just over 63,000 contracts as of June 29th. Ironically, this was the day before wheat futures began the bullish run, when short-covering buying may have been the fuel for the steep run-up in prices that we have seen during the past several sessions. If true, the rally may begin to stall unless we start to see fresh buying coming into the market, as well as see speculators move to becoming net-long wheat futures, instead of just exiting out of losing short positions.
Trading Ideas
Chicago wheat futures have rallied nearly 90 cents per bushel since the end of June, as speculators got caught net-short the market when fears of lower than expected wheat production in Europe and Canada hit the market. The rush to cover short positions may have caused wheat prices to become inflated. Some traders expecting wheat prices to correct lower but who wish to limit the potential risk on the trade if the rally continues may wish to explore the purchase of put options on wheat futures. An example of this trade would be buying the September wheat 540 puts. With September wheat futures trading at 548.50 as of this writing, the September 540 puts could be purchased for about 23 cents, or $1,150, not including commissions. The premium paid would be the maximum risk on the trade, and the trade would be profitable at expiration in August if September wheat is trading below 517.00.
Technicals
Looking at the daily chart for September wheat, we notice that the upside breakout that began on June 30th occurred on very heavy volume. The up-move sent prices well above the 20-day moving average, which triggered not only buy stops by those caught short the market, but also fresh buying by momentum traders. The following day's surge above major resistance at 500.00, the 100-day moving average, and the downtrend line formed from the January 11th yearly highs confirmed the price breakout. The 14-day RSI has moved well into overbought territory, with a current reading of 78.14. The February 16th high of 552.00 looks to be the next resistance level for September wheat, with support seen at the 100-day moving average, currently near the 500.00 level.
Mike Zarembski Senior Commodity Analyst
