Wheat is on the clock. Whether its draft yields an all-star or a bust should be known over the next month or two.
On average in years of higher prices, these spring rallies don’t actually give way to sharply higher prices. Futures tend to slide into the end of April, rebound if USDA’s first survey of yields confirms losses, then rally again in the summer when bushels off the combine disappoint.
A flexible strategy is needed both to protect the downside and take advantage of rallies. This could mean covering sales with September call options in late April or early June, or buying short-dated puts to capture some profits on the way down.
Using options won’t be without cost. Though most of these positions won’t last more than two or three months, the market has gotten more expensive since I recommended covering old crop sales with May $5 calls back in October. Those positions reflected a cost of only 14.75 cents. They settled at 11.875 cents Tuesday, after almost four months of time value decay. Prices are barely changed, so the options should have eroded money. But volatility has taken off, helping them maintain value.
Indeed, the volatility index for wheat shows just how much of a weather market this is. Volatility closed Tuesday above 25%, higher than the VIX in the stock market. While the wheat reading isn’t all that unusual for the grain market. It’s based on different factors. The VIX for stocks typically reflects the relative value of put options because investors are worried about falling prices. In grains, VIX rises typically on strength in call options, because traders want to be in position for bull markets. Not surprisingly, the CBOT raised wheat margins Tuesday after the close.
Seasonal trends for new crop suggest an initial top about now that doesn’t get taken out until spring in bullish years. Charts look toppy, with a bearish reversal in SRW and divergence with the RSI, which didn’t make new highs. HRW charts aren't quite as bearish, but are also in jeopardy.
Most of the risk production-wise is with HRW, making SRW the choice for hedging now – and it’s the only choice for options. To be sure, production risk abounds. Crop ratings at the end of January shaved another 2.5 bushels per acre off my forecast of winter wheat yield potential, with the crop now potentially smaller than 2017. These winter ratings can improve with moisture, and some precipitation is in the forecast for the southern Plains over the next two weeks.
I previously recommended being 30% hedged on new crop winter wheat at $5.35 basis July SRW for liquidity. Growers who aren’t at that level can ease into cash sales or hedges, or consider May SRW puts for a break into April. Given the weather risk it’s probably still too early to get up to 50% covered just yet.
Spring wheat growers likely have more time to pull the trigger. Last week’s drought monitor said even more spring wheat is in drought than winter wheat. That’s why Minneapolis September is in a modest uptrend while March is battle to hold lows at $6. USDA’s March 30 planting intentions report is the market’s next inflection point; a rally to buy acres would be an opportunity to step up hedges.
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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Adviser. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Market Review on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat futures that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.