While old crop/new crop corn and bean spreads stopped the bleeding in trading slightly higher for the week, outright contracts showed some promise today amid month end profit taking. Wheat though had a mid-week reversal. Lets examine Dec KC wheat. The low was 526.2 basis December this week. This was .382 percent fibbonaci retracement from the 2018 (high/low). Halfway back or 50 percent sits at 504.0. Near term highs are at 6.00 in Dec KC and a close over 5.64, could channel price up to the old highs and up 40 percent for the year at 6.00.
Fundamental News?
Rumors are swirling from various media outlets that Russia’s AG ministry is discussing the potential that Russia could either halt trade or impose taxes once total grain export volumes exceed 30 MMTs, or around 25 MMTs of wheat. Such a wheat export pace would be down 16 MMTs on last year, and shift considerable demand to other world suppliers particularly the US. The problem is that Ukraine/Romanian wheat production is of lower quality this year with smaller percentages of milling wheat, and droughts have gripped the EU, Australia and parts of Canada. The hunt could be on for high pro milling wheat with the US the likely benefactor of the world crop shortfall.
When markets trade higher on rumors and “if’s” and “maybe’s”, the effect on price sometimes is substantial.In this premise, the worlds largest net exporter could be exporting at least 1/3 less from a year ago. This is fundamental news unexpectedly entering into the market and its friendly for price. We finished 27 cents higher off the weekly lows. This news to me is friendly from a demand standpoint. Previous rallies have been for the most part supply side driven..i.e. weather related. However should this potential Russian news be nothing but rumor, look out below. New longs and funds could liquidate longs with 504.4 my downside target. Higher prices into the 6 handle for wheat should increase seedings not only at home but world-wide. Obviously producers would love to see higher prices but should be looking at them as opportunity to hedge future production in my opinion.
Trades to consider:
Buy the Nov Kc wheat 5.00 puts for 4 cents OB.
Buy the Dec Kc wheat futures and sell Dec corn. This spread finished the day at 1.88 Dec Kc wheat over. If we settle above 5.64 Dec Kc, look to buy wheat and sell corn and look for this spread to advance past 2.00 to push to 2.30 over.
Long Term Hedge:
Buy the July 19 Kc wheat 5.50 put. For every put bought, sell 2 Kc wheat 750 calls for a spread cost at even money. This ratio spread settled at 9 cents over this week. The market needs to rally approx. 20 cents to get filled and that may happen next week. If a producer is to get burned on the futures board let it be when prices are well above their production margins.
Please join me next Friday for a free grain and livestock webinar at 2 pm Central time. We will discuss supply, demand, technical’s, and the charts with opportunities using futures and options for your product. A link will be sent to your email upon signup.