Gary Hofer: Market Bullets

The global bellwether price for wheat in Chicago declined 30 cents in the five trading sessions ending Tuesday. So far it is only a threat to the established up-trend, but the market is about to reveal how much or little buying support is present at present levels or below. A failure to hold above $7.00 will break the short-term trend in Chicago July futures and set up more downward pressure.

The most significant event during the last week was the USDA report released last Friday morning, May 9, showing expectations for a record US corn crop at 13.935 billion bushels, soybeans at a record 3.635 billion bushels and US all-wheat production projected at 1.963 billion bushels. Global production figures were also generous pretty much across the board. As a result the urgency for buyers is lower.

As for market structure, the large commercial grain handling firms that make their profits moving wheat from producer to end-user are currently reported net short-sold. When these traders sell, it is because they have purchased physical wheat, either in the bin or to be delivered. They do not speculate, but use the futures market as a risk management tool.

Historically, this large and slow-moving group tends to buy all the way to the lowest price and sell all the way to the highest. When they are net sold at the levels reported this week, the price effect is at least non-positive, as the next big cyclical move will be to begin to accumulate buys. All of this implies a medium to long-term price high is due.

The large speculative funds known as "Money Managers" or "Hedge Funds" are multi-million or billion-dollar traders that can influence the price of wheat, usually on a shorter-term time frame, i.e. a few weeks or months, as they try to follow trends and capture profits for investors. These guys are quicker on the trigger than the Commercials, and they switch sides often, but they do tend to run as a herd.

For the smaller trader (fewer than 150 contracts by regulation) knowing where the commercials and large specs are is essential, as the two dominate the trading prairie like the buffalo herds on the plains long ago. Today, the "Big Specs" are net long at levels larger than any time in the last nine years except the summer of 2012, implying a new move down is approaching. Using these large factors for timing is not easy, as the time-frames are very wide, but going against them when they reach position extremes is hazardous.

Overall there are but two clear price-positive factors for wheat now: Alexander Putin's Ukraine gambit and weather. Putin seems likely to continue with steady pressure on Ukraine, and while he has not been impulsive so far, the sudden end-move for checkmate is clearly possible. At this point there has been not disruption of export or farming activities in the Ukraine. The weather factor is tapering off as whatever crop damage is going to happen in the western hard red winter wheat belt becomes measureable. There is downside risk in this market.

Information and opinions contained herein come from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital.