Wheat Retreats as Russian Exports Resume
Today's Idea
The recent sell-off in Wheat futures due to the Russian export news could spur an opportunity for traders to initiate bullish positions in either Kansas City or Minneapolis Wheat. For example, with September KC Wheat trading at 924.50 as of this writing, the September KC Wheat 800 puts could be sold for about 17 cents, or $850 per option, not including commissions. The premium received would be the maximum potential gain on this trade and would be realized at option expiration in August should the September futures be trading above 800.00. Given the risks involved in selling naked options, traders may wish to exit the trade prior to expiration should the September futures close below major chart support at 868.00.
Fundamentals
Wheat futures have had a rough start this month, with prices coming under pressure due to the announcement that Russia will lift its grain export restrictions starting July 1st. In addition, much needed rains are starting to occur in Europe, helping to alleviate some of the dry conditions seen in the eastern and central parts of the continent. The Russian agriculture ministry is expecting the country's grain harvest to rebound sharply, with current estimates calling for nearly 90 million tons this coming season. This is up from 60.9 million metric tons last year, as a severe drought forced the country to suspend exports. Russia is expected to be a major competitor in the export market this year, which would potentially hurt US export business. Ironically, the increases in Wheat production from Russia may be offset by the rather poor prospects for the US Winter Wheat crop. The weekly crop conditions report shows that only 33% of the Winter Wheat crop is rated good to excellent, vs. 65% last year. If that weren't enough, the Spring Wheat crop plantings are well behind average, with only 68% of the crop in the ground, vs. nearly 95% one year ago. Wet weather has hampered the spring plantings in North Dakota and Montana, and current weather forecasts are calling for additional rain in the coming days. There is now concern that the Spring Wheat acreage may fall short of expectations, with some analysts looking for a nearly 5% decline from the most recent USDA estimate. So while it appears that world Wheat supplies may be ample this year, we could still see a shortage of higher quality/higher protein content Wheat, which would likely favor the Wheat contracts traded in both Minneapolis and Kansas City.
Technical Notes
Looking at the daily chart for September KC Wheat, we notice prices consolidating in what appears to be a huge symmetrical triangle pattern. Currently prices are trading near the lower end of this chart pattern, and a breakout below the lower trendline could spark further selling pressure. However, prices still remain above the 200-day moving average, which is currently just above the 850.00 area. The 14-day RSI has turned weaker, with a current reading of 48.38. Near-term support is seen near the 900.00 area, with near-term resistance found near the top of the triangle pattern around the 977.00 area.
Mike Zarembski, Senior Commodity Analyst
