Gary Hofer: Market Bullets

Over the last week, no relief has been granted from the intense downward momentum in the price of wheat that has now lasted 19 trading sessions in a row as of Tuesday. Pretty much the entire month of May was a big problem for un-hedged wheat owners, as the price of Chicago July futures has declined $1.32 per bushel from the high point of $7.44 on May 6.

The usual emotional reaction to "missing" the higher prices available only a few short weeks ago is to shut down and do nothing. The cash sales of old-crop (2013's harvest) wheat have slowed, but as harvest encroaches north from Texas some wheat is always sold early just to pay the bills. Buyers are in no hurry, and the commercials, grain end-users, merchandizers and exporters, are steadily adding to their ownership of physical wheat.

None should be surprised at this harvest-led price decline. Grains in general are doing just fine in the northern hemisphere. Corn planting and emergence reports are solidly positive, leading analysts to ponder the potential for a very large crop. In the most recent summary from USDA, corn showed 95% planted and 80% emerged, with a condition of 76% good to excellent versus 63% a year ago. The only sore spot remains some of the western hard red winter wheat states, where drought has limited potential, but not enough to alarm the market. Good wheat production potential is showing in virtually the entire northern half of the globe.

With all that said, the futures market is called "futures" because it anticipates prices for later delivery. The fact of a good-to-excellent wheat crop is well known and now well built-in to prices. The move is getting very mature. Any further declines will have to be due to other factors besides supply. Global demand remains high for quality wheat from reliable suppliers, so even though US wheat is often the "source of last resort" and is still too expensive relative to others, i.e. Russia and the Ukraine, overall lower global wheat prices will allow buyers to take more.

The next thing to anticipate is a bounce, driven by shortterm factors such as previous speculative sellers buying back to take profits, capital moving into commodities and away from the stock, and/or markets on a potential interest rate increase down the line, or simple market exhaustion. In the past such "corrective" moves have been occasionally violent and ragged, depending on the type of ignition spark that lights the fuse.

It is not likely to represent a sudden real change in market fundamentals, but it may be large enough to last a few weeks. This is a very difficult trade to capture, as it requires the traders to identify an actual turning point in prices. In a market that does not have much respect for moves less than one dollar per bushel, the small trader can easily get whip-sawed to pieces trying to call the turn. Let's be careful out there.

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.