Wheat Loses Spec Love
Today's Idea
Wheat fundamentals remain biased to the bull camp at this time, but the attractive energy prices have lured some longs from the market. Global supplies remain extremely tight, and there is concern that losing acreage to Cotton coupled with bad weather could lead to a disappointing US crop. Technically, the market has tested the 750 level and held its ground. Some traders may wish to consider taking a neutral to bullish position and enter into a bull put spread by selling the April Wheat 750 puts and buying the 725 puts for a credit of 5.00, or $250. The credit is the maximum profit, while the risk of the trade is $1,000. Because of the inverse reward to risk ratio, some traders may wish to exit the trade after two consecutive closes below the 750 level to cut their losses.
Fundamentals
Wheat futures have slumped since hitting multi-year highs in February, largely due to the slowdown in deliveries. While current supplies remain extremely tight, many traders are looking forward to the US plantings figures. It will be interesting to see how the overlap between Wheat and Cotton plays out this year with farmers. With Cotton crossing through the $2 level, many Wheat farmers may be considering planting more Cotton to take advantage of high prices. Russia is also banning the export of Wheat, which is leading to lower planting intensions in that country, squeezing global supplies further. Chinese weather conditions have not improved, and there may not be enough rain/snow to leave any significant moisture in the ground. These factors can all likely be seen as bullish. However, India is expected to have a record crop this year. China has also been strategically stockpiling Wheat, so the world's most populous nation may not be in a rush to take further deliveries at these high levels. Commodity speculators have been leaving the grain and softs markets in favor of metals and energies due the political unrest sweeping the Middle East. Going forward, many traders will be keeping a close watch on weather conditions in Europe, Asia and North America.
Technical Notes
Turning to the chart, we see the May Wheat contract closing near support at the 800 level. The market recently broke through this level, but wasn't able to break through additional support near 750. Failure to close above the 20-day moving average can be seen as negative for the market in the near-term. A close above the average could be a signal that a near-term low is in place. To signal a new downside breakout, the May contract would likely have to close below the 750 level. On the upside, fresh highs above the 900 mark could signal an extension of the uptrend.
Rob Kurzatkowski, Senior Commodity Analyst
