Not All Wheat is Created Equal!
Monday, August 29, 2011
Kansas City Wheat futures are trading well below their yearly highs, but should find support from not only tight supplies, but should also follow the run-up in Corn prices as Wheat could become an alternate for feed usage should Corn prices rise sharply. For short option sellers, this might suggest potential trading ideas for selling puts in Kansas City Wheat options. For example, with chart support in December KC Wheat near the 770.00 area and the December futures trading at 890.25 as of this writing, the December 750 puts could be sold for about 8 cents, or $400 not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in November should the December futures be trading above 750.00. Given the run-up in prices lately, some traders may wish to wait for a short-term correction to initiate a trade in order to try to receive a more advantageous premium.
Fundamentals
Hard vs. Soft! That is the question grain traders are pondering regarding the price outlook for the different types Wheat futures. Bulls are favoring the "Hard" Wheat varieties, such as the Hard Red Winter Wheat (HRW) and Hard Red Spring (HRS) Wheat traded in Kansas City and Minneapolis respectively. A severe drought in the southern plains and portions of the central plains has prompted concerns about the start of the planting season for HRW wheat, with weather forecasts calling for continued hot and dry weather in the next 10 to 14 days. The HRS crop had a difficult time this year, as Wheat growers in the Northern Plains states like North Dakota and Montana had to deal with late plantings due to heavy rainfall and flooding in some areas. Crop conditions of the soon-to-be-harvested crop were reported at 62% good to excellent, which is down 4% from the previous week and well below the 82% seen last year. As of August 21st, only 29% of the Spring Wheat crop had been harvested, versus 49% last year. On the other hand, regarding Soft Red Winter Wheat (SRW), which is traded in Chicago, supplies are ample and US exports face continued competition from the Black Sea region, especially Russia and Ukraine. Going into 2012, it appears that Hard Wheat supplies will be tight, especially with quality concerns in German milling quality Wheat which has seen wet conditions turning a portion of the crop into feed Wheat quality. Should these fundamental factors carry over in to 2012, we should expect to see both Kansas City and Minneapolis Wheat futures outperform Chicago Wheat next year.
Technical Notes
Looking at the daily chart for December KC Wheat, we notice prices closing above the 200-day moving average for the first time since mid-June, which may be signaling the bear market run has ended. There is what appears to be stiff resistance above 900.00, and should prices close above this area on a weekly basis; a test of the 1000.00 level would not be out of the question. The 14-day RSI has turned positive, with a current reading of 65.73. Near-term support is seen at the August 9th low of 769.75.
Mike Zarembski, Senior Commodity Analyst
