Wheat Prices Rebound Despite Dollar's Gains
Fundamentals
Defying the effects of a stronger U.S. Dollar on Tuesday, Wheat futures climbed nearly 3%, as lower than expected crop condition ratings for U.S. Winter Wheat plus continued concerns about Wheat supplies from Eastern Europe and Russia overtook the positive "greenback effect". The USDA announced in its weekly crop progress report that only 47% of the Winter Wheat crop was rated good to excellent, vs. 62% this time last year. The tough start to the U.S. Wheat crop is making some traders nervous, especially after severe drought conditions wreaked havoc on the Wheat crops in Ukraine, Russia, and Eastern Europe earlier this year. In addition, Australia's Wheat production estimates have been cut to 22 million tons, down from 25 million tons, as weather conditions have been less than ideal. However, U.S. Wheat exports have been running below USDA projections, with this week's export inspections totaling 21.5 million bushels, which is below the 25 million bushel average needed to meet the USDA estimate. The biggest wild card will be world Wheat demand, especially from Asia and specifically China, whose appetite for commodities has not seemed to have subsided, despite the Chinese government's efforts to slow the country's growth. Although a weak Dollar should help Wheat exports here in the U.S., even a recovery in the greenback may not dampen Wheat prices should the Winter Wheat crop production totals disappoint, and countries are forced to scramble to meet the ever-growing demand for food -- especially in the emerging economies.
Trading Ideas
A quick look at a daily chart for Chicago Wheat futures causes us to notice a price base being formed, with support seen near the low of 643.50. Some traders looking for this low to hold may wish to explore selling out-of-the-money puts with a strike price below this key support point. For example, with December Wheat trading at 696.50 as of this writing, the December 640 puts could be sold for about 5 cents, or $250 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized at option expiration in late November should December Wheat be trading above 640.00. Given the potential risks involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such exit strategy might be to buy back the option sold before expiration should December Wheat close below support at 643.50.
Technicals
Looking at the daily chart for December Wheat, we notice a symmetrical triangle formation, which is normally considered a continuation chart pattern. The rule of thumb on these patterns is that prices will eventually resolve themselves in the direction of the previous major trend -- which in this case is up. Tuesday's sharp rally has prices closing once again above the 20-day moving average. The 14-day RSI has moved back into neutral territory, with a current reading of 50.79. The next major resistance level is seen at the October 11th high of 739.75, with major support found at the October 4th low of 643.50.
Mike Zarembski, Senior Commodity Analyst
