Gary Hofer: Market Bullets

For wheat owners, the wheat market is not a happy place. It looks like the buyers have taken a step back and folded their arms across their chests. Why rush to buy? There is plenty of wheat coming along this sum­mer, and production prospects for the other grains don't look so bad either. Let's see what kind of quality comes out of the Ukraine harvest before we rush to pay top dollar for US origin wheat.

Many would-be sellers are also a bit complacent, or maybe just a bit distracted. Too much recent volatility in prices may have caused de-sensitization. Sure, harvest has started in Texas and yields appear to be normal or better so far, but there is nothing unusual or alarming about that. Sure the trend has been nasty-negative for a few weekshellip; but Chicago wheat is only a dollar per bushel lower today than 3 weeks ago, and that is only one standard deviation from the 10-year mean.

Interest costs to carry wheat are low and there is the reasonable probability that the price will return to the mean (about $7.90 per bushel in the lead Chicago contract) with­in a year or sohellip;Even white wheat prices in Portland at are only about 70 cents down since May 6. And then of course there is the crop revenue insurancehellip;What? Me worry?

The recent trend has carried wheat prices below previ­ous levels of "support," where buyers were strong enough to prevent further declines in the past several months. There is nothing in the pattern that suggests a change in direction this week, although it seems likely we will see at least an attempt at a price-bounce in Chicago over the next week or two, just because it would be normal after 14-15 trading sessions lower to see a "correction". In this envi­ronment, such a reactive move could reach back upwards by something like 40-50 cents, but it will be a contra-trend bounce, notoriously difficult to capture and right into the teeth of harvest.

According to recent Commodity Futures Trading Com­mission (CFTC) regular reports, "Commercial" firms as a group are carrying net short-sold positions, a market structural condition more often associated with longer- term price highs than with lows. However, with -10,897 contracts as of the most recent report, the group has carried larger net short positions in the past, like the net -36,859 at the market peak in July of 2012, so there is room for more if many producers decide to sell physical wheat, which in turn leads the commercials to sell futures to balance the risk of their wheat in-hand.

Under similar circumstances in the past, most wheat owners have tended to quietly hold onto wheat, selling only enough to manage bills. For this group, market sur­render, or "capitulation" is not likely unless prices move quite a bit lower than at present.

Any trader looking to buy wheat today is relying on technical, chart-based ideas for the bulk of his or her rationale. Fundamentals are weak, and even though a big chunk of the relative risk of owning wheat is already drained due to the recent price declines, trading against the trend demands an athletic trading attitude; agile, mobile and hostile!

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.