Tight Supplies Force the US to be World's Bread Basket
Today's Idea
The Wheat market fundamentals have been extremely strong since the summer months, when drought and poor growing conditions around the globe set-up the current tight supply scenario. Technically, the chart is showing signs that prices may push above the 800 mark after prices broke out of the 650-750 trading range. The fickle and volatile nature of the grain markets may influence some traders to take a conservative approach and enter into a bull call spread with limited risk. Traders considering such a trade may wish to buy the Feb Wheat 800 calls and sell the Feb 825 calls for a debit of 8 cents, or $400. The trade risks the initial cost for a potential profit of $850 if the March futures contract closes above 825 at expiration
Fundamentals
Heavy rains in Australia and Canada have caused expectations relating to the quality of Wheat from these nations to be downgraded, which could create an extremely tight global market. According to the UN, the US may have a difficult time covering the shortfalls of these nations. This comes after a dreadful Russian harvest, where excessive heat and wildfires damaged crops. The US has plenty of supply at the moment, but logistical capabilities may limit how much of the grain actually gets exported. All of these factors have prompted importers to become much more aggressive, which has driven a very strong cash market. Prices have risen to the highest levels since August, when panic over the Russian crop drove near-month futures to over $8 before falling back. Today's export sales numbers will give traders a better idea as to whether some of these fears are overblown, or if supply tightness will take control of the market.
Technical Notes
Turning to the chart, we see the March Wheat contract consolidating just below the 800 level. A breakout above the 800 level would be seen as a technical breakout and could force shorts to cover. It would also mark the first time the near-month Wheat futures have traded above this level in over two years. The RSI is extremely overbought at 92.12, which has contributed to the recent consolidation.
Rob Kurzatkowski, Senior Commodity Analyst
