Wheat Rolls
Today's Idea
Given the strong Wheat fundamentals and the fact that the grain is a consumer staple, it is difficult to find reasons to go against the trend. While feed use may suffer, it is hard to imagine consumers cutting bread out of their diets due to rising costs. Wheat is entering into an area of congestion, but if it can cross through the near-term hurdles, most notably resistance near the 1000 level, prices could test all-time highs. Some traders may wish to consider getting into bullish strategy by buying the April Wheat 950 calls and selling the 975 calls for a debit of 6.50, or $325. The trade risks the initial cost for a maximum profit of $925 if the May futures contract closes above 975 at expiration.
Fundamentals
Wheat futures continue to trade at their highest levels since the fall of 2008 on strong demand and the extension of the Chinese drought. The small amount of moisture that China has seen from recent snowfalls is expected to have little to no effect on soil moisture levels. Large Iraqi tenders suggest that the Middle East may be stockpiling due to Egyptian unrest, as well as smaller demonstrations in Yemen and Bahrain. The strong cash demand, along with tight supplies due to weather conditions in Russia, Canada and Australia, has led to fund buying. The net long fund position, including futures and options, of CBOT Wheat has grown to 43,432 contracts. The non-commercial reportable net longs in the three major varieties of US Wheat stands at 122,175 contracts as of February 8th. Unlike other grains, Wheat is not easily substituted and prices are not as elastic as other commodities. For these reasons, consumer demand may continue to rise, despite increased costs.
Technical Notes
Turning to the chart, we see that yesterday, the May Wheat contract took out the relative weekly high close of 890.50 from August of 2008. The next area of resistance may be found at the June 2008 weekly high close of 912.00. Further resistance can be found at the 1000 level. Prices are above the major moving averages. It looks as though momentum and RSI are beginning to show positive divergence, suggesting near-term strength.
Rob Kurzatkowski, Senior Commodity Analyst
