Wheat on Sale?
Today's Idea
This year's Hard Red Winter (HRW) Wheat crop certainly has been a disappointment, with the current drought certain to cut production. This Wheat variety is traded as a futures contract on the Kansas City Board of Trade (KCBT). A quick look at the chart for September KC Wheat shows good chart support around the 790.00 level. Some traders who are expecting KC Wheat prices to remain stable or move higher may wish to explore selling puts with a strike price below chart support near 790.00. For example, with September KC Wheat trading at 885.00 as of this writing, the September 750 puts could be sold for around 12 cents, or $600 per option, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in August should the September futures be trading above 750.00. Given the risks involved in selling naked options, traders may wish to close out the trade prior to expiration should the September futures close below chart support at 790.75.
Fundamentals
After falling to 8-week lows on the back of a bearish USDA report, importers seem to be returning to the Wheat market, as lower prices seemed to have enticed buyers back to the market. The recent sell-off throughout the grain complex likely was caused mainly by resurgence in the U.S. Dollar and fund liquidation throughout the commodity complex. However, fundamentally, there remains a concern that global production may not be able to keep up with demand. Here in the U.S., there remains some doubt regarding the size of the U.S. Hard Red Winter (HRW) crop, as drought conditions in the southern plains have severely hurt the quality of the soon-to-be-harvested crop. The USDA has estimated all Winter Wheat production at 1.424 billion bushels, which is down just over 60 million bushels from the 2010 crop year. However, many traders were looking for a production figure closer to 1.390 billion bushels due to the poor condition of the HRW crop. Globally, it appears that production should increase in Russia and Ukraine this season. This is important for the global Wheat market, as both countries were forced to severely curtail or completely shut down their export markets last season due to severe drought. U.S export sales last week came in at 320,600 for the current year and 229,900 for next season's crop. This put U.S. exports above the USDA projections for this season. Though increased global Wheat plantings this year should see global Wheat production increase, it is still up to the weather to ensure an adequate crop, and given the difficulties seen so far this year, there is no guarantee that Mother Nature's wrath will be benign this year.
Technical Notes
Looking at the daily chart for September KC Wheat, we notice prices seem to be forming a consolidation pattern, with daily trading activity taking place on both sides of the 20-day moving average. Longer-term, the 200-day moving average remains below the current market price, keeping the longer-term trend firmly in the bull camp. The 14-day RSI has moved to a neutral stance, with a current reading of 46.43. Near-term support is seen at 868.00, with resistance found at 992.00.
Mike Zarembski, Senior Commodity Analyst
