Wheat Inundated with Selling

December 18, 2009

Name: Brian Henry

Company: Archer Financial Services

Years Trading: 15

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The pressure on the wheat market continues. The overbearing burden on the wheat market is the massive global supply of wheat. The dollar remains the key factor in terms of day to day price action.

The strengthening of the dollar, which limited fund buying initially, has resulted in fund selling. Each push higher in the dollar triggers additional fund selling. Until today, the March contract in Chicago had been supported by the 100 day moving average of 527. That level was breeched today, which resulted in pretty heavy selling. My initial low level mark of 515 was also breeched today. The new objective is most likely 500. The trade will likely see some follow through selling going into Friday’s trade. If follow through selling does not materialize, the market may see a modest short covering correction. Again, the dollar will be a key factor.

What happens to the dollar is anyone’s guess at this point. In addition to short covering in the dollar, it appears many are returning to a long dollar stance as a flight to quality. The shine has definitely come off the risk trade as stocks and most commodities work lower. Inflation does not appear to be a threat at this point.

The lower futures prices for wheat are being offset by the higher dollar. As a result, lower futures prices have done little to increase the competitiveness of US wheat on the global market. Soft wheat sales remain very slow as EU and Black Sea wheat is considerably cheaper. The hard wheat classes continue to do some business, but sales are at a slow pace. Generally, the hard wheat trade is going to routine Pacific Rim customers. The USDA should be able to reduce export expectations, and increase the carry out, unless the pace of exports increases considerably. Increased exports will require lower prices.

Regardless of the market you are positioned in, focus on the March contract in Chicago. I would give this market a chance to test the $5.00 level. On Friday, I am going to take a look at taking profits on the puts and put spreads that my customers own. We may be a little early, but it never hurts to take profits. I will be more aggressive taking profits on short calls or short futures positions. I am not a wheat bull by any stretch, but I am inclined to take profits on this break. A sharp short covering rally, dollar driven or not could be very detrimental to our positions as we move towards the first of the year.

If you would like more information on grain futures trading or have any questions about this article, please contact Brian Henry at brian.henry@archerfinancials.com or call him at 1.877.377.7965.

This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of AFS is strictly prohibited.

About the Author

Brian developed his interest for the futures market, while growing up on a small grains farm in North Central North Dakota. These experiences allowed him to gain hands on knowledge of the risks associated with farming. Brian pays close attention to the ever changing developments of the agricultural industry. Brian’s first opportunity on the business side of the futures industry was with ADM Investor Services, Inc. As an employee of ADM Investor Services on the trading floor of the MGEX, Brian provided market insight to various customers ranging from large commercial grain companies to country elevators and producers. As a member of the MGEX, Brian experienced the futures industry as a floor broker. His current duties as an Introducing Broker for ADM Investor Services allow Brian to use his experiences to provide clients with insight into market functionality, market analysis and risk management.