"Quality" not "Quantity" Sending Wheat Prices Higher
Today's Idea
The concerns over the potential global supplies of high quality milling Wheat would seem to favor the Hard Red Wheat futures contracts traded in Minneapolis and Kansas City over the Soft Red Wheat traded in Chicago. Given the potential volatility increase we could see in this Wheat "weather" market, some bullish traders may wish to explore the purchase of a bull call spread in either Kansas City or Minneapolis Wheat futures options. For example, with March Kansas City Wheat futures trading at 850.50 as of this writing, the March KC Wheat 880 calls could be bought and the 980 calls sold for about 26 cents, or $1,300 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential gain of $5,000 per spread minus the premium paid realized at option expiration in February should March KC Wheat be trading above 980.00.
Fundamentals
Sometimes numbers can be deceiving. This is certainly the case in the Wheat futures market, where prices have soared to 28-month highs, as record-setting rainfall in parts of Australia, which is the world's fourth largest Wheat exporter, has traders concerned about the quality of the Hard Red Wheat being produced. The inopportune rains have severely affected the quality of the Wheat crop in Queensland, with some analysts expecting nearly half the harvest will not be of milling quality and will end up as feed Wheat. Additionally, the Hard Red Winter Wheat crop in the U.S. has struggled so far this year, with dry weather in the western plains preventing the crop from receiving adequate snow cover to help protect it from the potential of "winterkill" due to below freezing temperatures. The importance of an ample harvest of milling quality Wheat out of Australia and the U.S is even more important this year, because Russian Wheat was taken off the export market due to the severe drought this past season. This has set the stage for potentially very tight global milling quality Wheat inventories, as buyers scramble to obtain supplies early in the year to prevent potentially being caught short should the U.S. and Australian crops fall below estimates.
Technical Notes
Looking at the daily chart for March KC Wheat, we notice the market putting in a major price floor around the 700.00 level. Since the sharp rally on December 1st, prices have not closed below the 20-day moving average, which has kept many short-term momentum traders firmly in the bullish camp. However, those looking for a short-term correction in prices will note the drop in volume since the December 1st upside breakout. Also, there is a large bearish divergence in the 14-day RSI that has been in place since the August highs, but it has failed to halt the rally so far. The contract high of 881.50 is the next resistance area for the March futures, with support seen at the recent low of 798.50 made back on December 17th.
Mike Zarembski, Senior Commodity Analyst
