Commentary
The wheat bulls do not seem to be willing to let this market fade further as not only short covering has emerged but now some aid from outside markets perhaps. It is my belief that the near-term resurgence of corn and beans is helping fuel the rebound in wheat. Open interest has been on a steady decline since mid-July as the funds have short covered a majority of their short positions, but now we see open interest slightly increasing where near term breaks are supported, and resistance levels are challenged again in the Chicago contract. Rallies though will continue to need a story as US origin wheat continues to deal with poor demand. However, with the bulk of harvests over around the world, the building dryness in many of those same regions are taking precedence over the lack of demand. Uncertainties are starting to emerge from a supply side standpoint. Russian consultancy Sov-Econ said that winter wheat planting rates in Russia have fallen to an 11-year low, raising the possibility of low production in the southern and Volga regions next year. Warm and dry conditions continue for the bulk of Canada with the Black Sea staying dry with little hopes of much moisture over the coming few weeks.
The Canadian workers strike at 6 Vancouver ports started yesterday and is expected to last for at least 72 hours and 52% of Canada's grain exports move out of Vancouver. If the strike extends beyond the next couple days, US wheat may see a bump up in export business. Monday's quarterly Grain stocks report is expected to show wheat stocks at 1.992 billion bushels, up 13% year-over-year. All wheat production in the US is expected at 1.983 billion bushels, near unchanged from USDA's August figure of 1.982 and winter wheat production is expected 1.360 billion, also near unchanged from the August number of 1.361. Trade idea below in Chicago wheat.
Trade Ideas
Futures-N/A
Options-Buy the Dec 590 call (settled at the money as of todays close) and sell the May 25 7.00 call (currently .83 cents out of money) as a spread for a 3-cent collection.
Risk/Reward
Futures-N/A
Options- Unlimited risk here as one is short a May 25 call that expires 5 months after the December long call. Our target is to enter the spread with a 3-cent collection with a target of 20 cents Dec calls over the May if the market can trade up to the 100-week moving average at 6.36 and near a 618 retracement 6.41, from the spring highs to the summer lows. Suggested risk is 7 cents or $350.0 from entry plus trade costs and fees.
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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