Wednesday, December 7, 2011

Wheat prices appear to have entered a new period of price consolidation within a range of 650.00 on the upside and 580.00 on the downside. Given the bearish fundamentals currently in play in the Chicago Wheat market, some traders may perhaps wish to explore the sale of calls in Wheat futures options with strike prices above the highs of the recent price range. For example, with March Wheat currently trading at 608.75 as of this writing, the February Wheat 700 calls could be sold for 7 cents, or $350 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 late January should March Wheat futures be trading below 700.00.

Fundamentals

It’s getting tough to be a U.S. Wheat exporter lately, as ample world supplies combined with a moderately strong U.S. Dollar are driving global buyers away from U.S. Wheat. Huge Wheat surpluses in Russia and Ukraine have brought both these nations back to the export market in force, undercutting prices and driving some traditional U.S. Wheat buyers such as Egypt and Japan to purchase Wheat from the Black Sea region. In addition, it appears that other U.S. competitors such as Australia and Canada are expecting larger Wheat crops this coming season. Australian Wheat estimates were raised by 8% from the September crop estimate. Stats Canada has raised its Canadian Wheat crop estimate to 25.3 million metric tons, which if accurate, would be 9% above last year’s projection. Here is the U.S., weekly Wheat exports came in at just under 14.5 million bushels last week, which is well under the weekly average needed to meet USDA projections. Weakness in Wheat prices has not been lost on speculators, as the most recent Commitment of Traders report shows large and small speculative traders combined are holding a net-short position in Chicago Wheat of nearly 78,000 contracts as of November 29th. Though prices are holding near yearly lows, $6.00-plus Wheat is not historically cheap, and further price declines are not out of the question should U.S. Wheat prices remain uncompetitive in the global export trade.

Technical Notes

Looking at the daily chart for March Chicago Wheat, we notice prices failing to close above the 20-day moving average on the last rally attempt. Volume is starting to be rolled from the December to the March Wheat contract, as first notice day for the December contract approaches. There is a bullish divergence forming in the 14-day RSI, and with speculators net-short Wheat and a USDA report due out on Friday, we may see a short-covering rally occur in the next couple of trading sessions, as weak bears lighten-up their positions ahead of the report. Support for March Wheat is seen at the November 25th low of 586.00, with resistance found at 637.25.

Mike Zarembski, Senior Commodity Analyst

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