Too Much Heat for Wheat?
Today's Idea
The continued dryness seen in the southern and southwestern parts of the Great Plaines is mainly affecting the Hard Red Winter Wheat (HRW) crop traded on the Kansas City Board of Trade (KCBT). A quick look at the daily chart for the July KC Wheat futures shows some chart support near the 835.00 to 840.00 area. Some traders who are considering going long KC Wheat if prices pull back towards this support point may wish to explore selling puts in KC Wheat with a strike price near this support area. For example, with July KC Wheat trading at 898.00 as of this writing, the July 840 puts could be sold for around 30 cents, or $1,500 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in June should the July futures be trading above 840.00. Given the risks involved in selling naked options, traders should have an exit strategy in place should the position move against them. One such strategy would be to close out the trade before expiration should the July futures close below near-term support at 835.00.
Fundamentals
Wheat futures prices are caught between continued weather woes for the Winter Wheat crop, as dry weather in the southern plains has crop conditions plummeting. However, a "bearish" commodity call by Goldman Sachs has traders fleeing long commodity positions. U.S. Winter Wheat conditions continue to disappoint, with the weekly crop conditions report showing that only 36% of the crop is rated good to excellent, which is down 1% from the previous week. For comparison, last year at this time the crop was rated 65% good to excellent. The U S is not the only country with potential problems with its Wheat crop, as China is also experiencing a severe drought in the northern regions of the country where the bulk of the country's Wheat is grown. Though global Wheat supplies currently remain ample, especially compared to Corn and Soybeans, there is some additional demand found for feed Wheat, as record high corn prices make this an economical option for some. However, traders are currently putting the fundamentals on the back burner, as word spread that Goldman Sachs has started to advise some of its clients to exit a basket of commodity products, because it is believed the markets may have become overbought in the short-term. A look at the most recent Commitment of Traders report shows large non-commercial traders are holding a net-long position of just over 99,000 contracts combined in the three major Wheat futures here in the U.S. Though this is well off the record net-long position, it is still a sizable position. Should the commodity-wide liquidation continue, we could see prices fall further until we start to see late longs taken out of the market and some health restored for the next bull run.
Technical Notes
Looking at the daily chart for July KC Wheat, we notice the sharp sell-off we saw on Tuesday was stopped in its tracks at the 20-day moving average. The price decline the past several sessions may be part of the formation of a bull-flag on the daily chart. Momentum as measured by the 14-day RSI has moved back to a more neutral reading of 50.64. The recent high made on April 5th at 968.00 looks to be the next resistance point for the July futures, with near-term support found at the March 23rd low of 835.00.
Mike Zarembski, Senior Commodity Analyst
