On August 2, the September wheat futures price (CBOT) reached the lowest level since 2006. However, despite the fact that the wheat market looks very negative now, I believe a further decline in prices is unlikely.
First of all, I would like to note the extreme nature of the money managers' the current position.
According to the COT, since June 21, the money managers were continuously increasing the size of the net short position in wheat SRW (CBOT). As a result, as of July 26, the net short position of the money managers reached 130 184 contracts - this is a maximum for the past four years. At that, the net amount of contracts sold by the money managers is 23.19% of the open interest on this exchange, which is also a multi-year maximum. I believe that the current price level would soon force the money managers to gradually begin to lock in profits on a relatively large number of sold contracts, which will create strong resistance to the further reduction in wheat prices.
Source of data: Commitments of Traders
The technical analysis at least gives no reasons to anticipate a further decline in prices. The MACD indicator gave the buy signal on July 20, when the September wheat futures price reached a level of $ 4.06. Over a month, the Stochastics indicator has been pointing to the oversold state of the market, as well as an attempt to consolidation. In general, it is worth noting that during the period from June 08, the wheat futures price has fallen by more than 23%. And for this market and the current price level, it is objectively a very substantial fall.
Moving on to the fundamental factors.
According to the latest USDA data, in the new season the accumulated U.S. wheat exports coupled with outstanding sales has reached 41% of the current exports forecast. Over the past 5 years, this is only 1% lower than the record indicator of 14/15. In my opinion, the U.S. wheat is in demand in the global market despite the growing competition from the EU and the countries of the Black Sea region.
Source of data: USDA
The current USDA forecast assumes that in 16/17 the global wheat ending stocks will reach a record high of 253.7 million tons. 44% of this figure accrue to China. It also should be remembered that China does not export wheat, and, therefore, the indicator of the final balance in this country only formally affects the structure of the global balance.
I thoroughly considered this point in the previous post, but for now I would like to remind once again that if you analyze the long-term changes in the global wheat supply and demand, excluding the influence of China, the current year's balances do not suggest the wheat price below the last year's level.
Now the wheat market is affected by the adjacent corn market. The condition of the corn crops in the United States remains consistently good, which leaves little chance of reducing the harvest this year. However, watching the market, I cannot help noting that the continuing decline in the corn price has fewer and fewer effect on the wheat price.
At the moment, there are no factors that could reverse the wheat market, but the further decline is also unlikely. In such a situation the most balanced trading strategy would be selling put options.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.