Are Wheat Futures Base-Building?
Wheat prices have been trading sideways for many months. Base-building is a term used in charting which represents a sideways price pattern following a futures price drop. The importance of base-building, especially in front of a new production season, is that it suggests demand is utilizing supplies on hand, and it may be just a matter of time before prices rise due to production uncertainty. While not ready to rally just yet, prices are finding plenty of buyers on setbacks.
Why this is important…
The March Chicago wheat contract has been base-building since late September in a price range of approximately $5.50 to $6.40 with most pricing activity near $6.00. This prolonged pattern suggests limited supplies are helping to provide support for prices. At the same time, there’s not enough fundamental reason for traders to aggressively buy. Russia, over the last two years, has been an aggressive seller of wheat after harvesting record-large crops. Russia continues to lead the world in export sales and has been undercutting many other exporting countries. Outside of Russia, countries that export wheat have combined supplies that are the lowest in 15 years. In other words, if Russia experiences growing conditions that threaten the crop, there is limited supply outside of Russia to fill contracts of importing countries. The year ahead could be very interesting, depending on how expected production numbers change.
We see a couple of scenarios that could play out. World wheat crops could rebound in the year ahead and prices trend in a sideways-to-lower fashion. However, lower prices this past year will likely increase demand. Therefore, any disruption to supplies from exporting countries, including Russia, could quickly add premium to wheat prices. The weather over the next several months will be paramount to dictating future supplies. Some are suggesting challenging conditions for the Black Sea/Russia region, anticipating a warmer and drier pattern. If this does happen, the market may get concerned about limited supply. On the July 2023 Chicago contract, a 50% retracement from the summer 2023 high price and fall low suggests a rally to near $7.00. If both end users and speculators aggressively buy, the next targeted region would be the 2023 summer high of $7.99.
What can you do?
A couple strategies for the wheat you intend to grow this year are to purchase puts to establish a price floor or forward contract and purchase calls. The owner of a put option has the right (not the obligation) to sell futures. The upside is left open for price appreciation. Risk is premium paid for the put plus commission and fees. Forward contracting also establishes a price floor and creates a price ceiling. To participate in a rally, you can purchase call options. The owner of a call has the right (not the obligation) to buy futures. The risk on the call option is premium paid plus commission and fees. A combination of both strategies could be considered. As with any strategy, understand the potential risks and rewards before entering. Have a conversation with your advisor to ensure you have a roadmap of what to expect, regardless of which direction prices move.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
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