The dominant feature of USDA’s first supply and demand estimates of the 2010/2011 wheat marketing year is the increase in beginning stocks, reports Mark Welch, a TexasAgriLife Extension economist. “Despite tighter fundamentals for the new crop year, the large carryover from 2009 causes ending stocks to increase 47 million bushels. The stocks to use ratio measured by days of use on hand at the end of the marketing year is expected to be unchanged in the new marketing year, and near the 20-year average.”
On Thursday, the Kansas City July contract broke its uptrend line and pushed the 4-day moving average 8¢ below the 9-day moving average—a negative sign. “This combination is enough to trigger some preharvest sales,” says Welch. “I do not see a lot of downside price risk from here but want to get a price floor in place. I also want to profit if prices move higher so I will recommend an option strategy preferred by Steve Amosson, our district economist in Amarillo:
The collar strategy involves buying a put option to set a price floor then selling a put and a call to lower net premium paid. Specifically, buy a put option near the money to set a price floor ($4.90 at 18¢), then sell a put with a lower strike price ($4.50 at 5¢) and sell a call ($5.40 at 8¢). This means you pay a net premium of 5¢/bu. plus brokerage fees.
My local basis is –$1 so the strategy establishes a price floor of $3.85 when prices are between $4.50 and $4.90. Below $4.50, the strategy becomes a price-enhancing tool adding 35¢/bu. to sales. For futures prices from $4.90 to $5.40, the price received rises or falls with the market. Selling a call caps the selling price at $4.35/bu. ($5.40 minus $10 basis minus 5¢ premium paid). These prices compare with a cash forward contract (CFC) of $4 or doing nothing (cash moves with futures price minus basis).”
Read Welch’s full commentary. (PDF)
