Wheat rallied last week due to fears that the Russian/Ukraine crisis could slow or halt exports.
However both nations are in need of foreign reserves and the short covering rally was short lived. World production estimates continue to climb and US prices are well above foreign competitors. Therefore, without supply disruptions from the Russian/Ukraine region, there seems to be little reason why Chicago wheat futures wouldn’t trade lower in my opinion.
Russia’s decision to ban imports led some to speculate whether or not Russia would also ban wheat exports in an effort to maintain adequate food supplies. However it became clear by last weekend that Russia would need the foreign exchange generated by wheat sales and not further disrupt trade with importing nations that have nothing to do with the sanctions.
Harvest in Europe is well under way and yield estimates for Russia have been rising. Private forecast estimates have the Russian wheat crop coming in at 56 million tones with supply projected at 61.2 million tones, the largest since 2011. It is my opinion that Russia seems eager to sell wheat early this year by discounting prices, and sending excess supply into exports to generate foreign exchange. The Ukraine is also in desperate need of foreign exchange and as long as Russia does not blockade their ports to destroy shipping infrastructure, it is expected that they will export as much as possible going forward. It is my contention then that supply will outpace demand, and that foreign ports mainly in the Ukraine and Russia will continue to discount milling wheat cheaper laving the U.S. as a third or fourth port for global exports.
Therefore I propose the following trade. To define risk, look at buying the December wheat 530 put for 13 cents, or in cash value $650.00. The risk on the trade is the price paid for the put, plus all commissions and fees. A close below the trend line on the chart about 5.38 should indicate lower prices going forward in my opinion.
For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 p.m. central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.