What happened
Wheat prices have been moving sideways for many months. Basebuilding is a term used in charting to represent a sideways price pattern following a futures price decline. The importance of building a base, especially before a new production season, is that it suggests that demand is using existing supplies and it may only be a matter of time before prices rise due to production uncertainty. Although prices are not yet ready for a recovery, they find plenty of buyers during setbacks.
Why this is important
The March Chicago wheat contract has stabilized in a price range of about $5.50 to $6.40 since late September, with most price activity around $6.00. This persistent pattern suggests that limited supplies are helping to support prices. At the same time, there are not enough fundamental reasons for traders to buy aggressively. Russia has been an aggressive seller of wheat over the past two years after reaping record-breaking harvests. Russia continues to lead the world in export sales, undercutting many other exporting countries. Outside Russia, countries exporting wheat collectively have their lowest inventories in 15 years. In other words, if there are growing conditions in Russia that threaten the harvest, supply outside Russia is limited to fulfill importing countries' contracts. The coming year could be very interesting depending on how expected production numbers change.
We see a few scenarios that could play out. The world wheat harvest could recover next year and prices are trending sideways to downwards. However, lower prices last year are likely to increase demand. Therefore, any interruption in supplies from exporting countries, including Russia, could quickly lead to a rise in wheat prices. The weather over the next few months will be crucial for future supplies. Some suggest difficult conditions for the Black Sea/Russia region and predict a warmer and drier pattern. If this happens, the market could be concerned about limited supply. In the July 2024 Chicago contract, a 50% retracement from the summer 2023 high and the fall low suggests a recovery to near $7.00. If both end users and speculators buy aggressively, the next target region would be the 2023 summer high of $7.99.
What can you do?
Some strategies for the wheat you want to grow this year include buying puts to set a price floor, or futures contracts and buy calls. The put option holder has the right (not the obligation) to sell futures. The uptrend remains open for price to rise. The risk consists of the premium paid for the put plus commissions and fees. Forward contracting also sets a price floor and a price ceiling. To participate in a rally, you can purchase call options. The holder of a call has the right (not the obligation) to purchase futures. The risk with the call option consists of the premium paid plus commissions and fees. A combination of both strategies could be considered. As with any strategy, you should be aware of the potential risks and rewards before getting started. Have a conversation with your advisor to make sure you have a handle on what to expect no matter which way prices go.
Editor's note: If you have any questions about this perspective, please contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Disclaimer: The data contained herein is believed to have been obtained from reliable sources, but no guarantee can be given. Persons acting on the basis of this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Trading futures and options involves significant risk of loss and may not be suitable for everyone. Therefore, consider carefully whether such trading is suitable for you given your financial situation. Examples of seasonal price movements or extreme market conditions do not mean that such movements or conditions are or are likely to occur frequently. The seasonal aspects of supply and demand are already taken into account in the forward prices. No claim is made that scenario planning, strategy or discipline guarantees success or profit. Any decisions you make to purchase, sell or hold a futures or options position in relation to this research are solely yours and are in no way endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc. and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered as an introducing broker with the Commodity Futures Trading Commission (CFTC) and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and equal opportunity provider. Stewart-Peterson Inc. is a publisher. A customer can have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are 100% owned by Stewart-Peterson Group Inc. Unless otherwise stated, the services mentioned are services of Stewart-Peterson Group Inc. Submitted for bid.
About the author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his customers, their success and long-term, fruitful relationships. As senior market consultant and vice president of brokerage solutions, Doherty lives and breathes agricultural marketing. He has a deep understanding of tools and markets, listens and communicates specifically and clearly to ensure customers are satisfied with decisions.
Comments are closed.