Gary Hofer: MARKET BULLETS

Wheat is an actively traded market, with participants ranging from individual small speculative traders, farmers and local cooperative elevators to billion dollar trading funds and multi-national grain handling firms.

There are futures contracts trading all over the world, but soft red wheat futures at the Chicago Board of Trade are the best known and most widely followed. This is partly because of its reputation as a reliable indicator of global wheat prices, and partly due to its great liquidity or ease of trading, from “one-lots” of 5,000 bushels to million-bushel orders.

There is an intense level of scrutiny of this transparent market by every commentator, analyst, trader, grain buyer, farmer, fund manager and barkeeper. That creates a kind of hum of activity that rises and falls, something like a beehive.

Every so often something comes along and whacks the hive with a stick, raising the tone of the colony to a new level. This last few days, the stick was the Chinese government’s decision to devalue the Yuan a couple of percent versus other global currencies. Wheat prices had been on a little upward run, 30 cents higher over the last week, but Tuesday we gave back about 60% of that gain.

It must be presumed that China devalued their currency this week in an attempt to increase their own export sales by cutting the relative cost of things Chinese to the world markets, not to mention slowing imports. Sales of US-origin soybeans in particular are caught in this issue. Wheat is mostly an observer this time, as China is harvesting a big wheat crop this year.

China is in the middle of a setback in their economy and stock markets, although so far it has not exceeded any historically normal measures. The Shanghai Composite Index has dropped very neatly back to about 50% of the upward move that began in June of 2013. An extension of the move to 61% (Fibonacci) would still not be anything unusual.

While it is an unpleasant experience for many participants, 50% is a “normal” re-tracement (halfway back to the beginning point of a given price move) for any active market and should not be viewed as apocalyptic. We are likely to see such a re-tracement in our own domestic stock markets at some point, implying much hand-wringing and many calls for changes to “protect” our financial system as the Dow Jones pulls back toward 12,000 or 10%-20% below the highs.

The problem is that most if not all of the potential changes called for are likely to make matters worse for thee and me. This apprehension will continue to dominate the tone of the financial hive.

The very short-term wheat price trend is presently seen as positive, but the house is built on sand. The northern hemisphere is about to complete a decent harvest across the board. There is wheat available for sale and the buyers are able to be picky. Global currency instability does not lead increased international trade. Wednesday’s USDA reports notwithstanding, the wheat market is not ready for a big upward price run.

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.