Wheat Woes

Fundamentals

Grain futures are higher this morning, largely due to traders covering shorts and decreasing position size in light of the USDA’s supply and demand report. There is not expected to be a bullish surprise in the report, but the unpredictability of the USDA’s estimates is always on the minds of traders. Wheat futures have had little in the way of positive news lately. In addition to large supplies domestically, India, the world’s second largest grower, is expected to increase plantings over last year’s record crop. This could lead to a supply glut of the grain. The Wheat market has been plagued by weak demand and large supplies, so it would likely take a major revision in the USDA’s supply and demand report to support higher prices. The consensus estimate is unchanged from last month’s 976 million bushel ending stocks figure. Based on the current supply and demand data, it is difficult to make a case for Wheat to push higher, however further short-covering could act as support in the near-term. The Dollar’s movement will likely also have an impact on how prices behave, as it could influence the allocation of funds toward commodities. The Dollar Index chart does show overbought levels, which hints that the greenback may move sideways or possibly lower.

Trading Ideas

Things have not gone in Wheat’s favor either technically or fundamentally, but prices may be supported by a surprise in the USDA report and short-covering in the near-term. For this reason, some traders may wish to wait for confirmation of a downside breakout below the 470 level. Some traders may want to consider shorting a future on a solid close below 470, with a protective stop at 505 and a downside objective of 420. The trade risks $1,750 for a potential profit of $2,500.

Technicals

Turning to the chart, The March Wheat contract has bounced off of support in the 470 area, but has been unable to push above near-term resistance near 495. If prices fail to cross the 495 area in the near-term, the chart suggests that this may simply be a period of consolidation, which has a negative bias. The momentum indicator has remained flat, despite the recent bounce, hinting at near-term technical weakness.

Rob Kurzatkowski, Senior Commodity Analyst