Grain Spreads: Funds Flip Short Wheat

Commentary:
Wheat futures finished Friday near this week’s lows after opening higher last night. The market needs to close below 574 next week to eventually confirm further weakness in my opinion as the crop enters dormancy. There is some good news abroad for winter wheat that is garnering headlines and adding potentially adding pressure. The French wheat crop is developing well, with 96% rated in good or excellent condition as of Nov. 30, steady with the week prior, France- AgriMer data showed today. That’s a dramatic improvement from last year at this time when just 73% of the crop garnered top marks, Canada wheat production was pegged at 35.2 million tonnes. The biggest crop in 7 years. And larger than expectations of 34.3 million metric tons. Traders also see big crops coming from Australia even as Australian shippers are reportedly shying away from offering wheat to the Chinese market, with Beijing’s actions on other commodities like barley and wine making shippers on either side of the ocean unwilling to do business with the other country. That adds to the Aussie supply with India of all places filling the export need into China.

More important for me is that managed funds flipped to a net short in Chicago wheat as they sold 19,696 contracts to go net short of 4397 contracts per CFTC data released this afternoon. It has been my experience that funds wont stop at just a 4K net short. They most likely will build a short of 20 to 30K in length. Given Chicago has the highest prices on the Board vs KC and Minneapolis, I contend that its overvalued. Funds are still net long KC at 44K and net long Minneapolis at 4K. All the managed position data given today was as of the close on Tuesday Dec 1^st. A close under 574 on the weekly continuous chart below point to a drop to 555 and then 535 in my view. How to play it? The simple way would be to sell futures on a sell stop at 574 and see if the market closes below. This is the easiest way but also the most risky as the market could down tick, and then reverse course and trade higher without warning on something entering the market or outside grain markets rallying. It could be for a myriad of reasons. Condition data was elevated in the Soft red winter wheat states east of the Mississippi which is exact opposite of the hard red winter ratings in Texas, Oklahoma, Kansas, and Colorado. The ratings maybe the reason for going short Chicago wheat vs long corn, or long KC or Minneapolis wheat. Option idea below. Its just one idea, not THE idea.

Trade Idea

Futures-N/A

Options-Tight bet here with 20 days left before option expiration on 12/24. Buy the Jan 21 wheat 550 put option for 3 cents. Cost is 150 plus commissions and fees.

Risk/Reward.

Futures-N/A

Options-The cost of the option plus which in this scenario is 150.00 plus trade costs and fees. If the market breaks I look for wheat to trade down to 535, if so I would look to offer the option at 20 cents.

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