Most brokers will admit when there is a big bull market, it is easier to add new clients and for the clients they already service, it is easier to suggest trades clients want to do. But when there is a bull market due to crop destruction, when farmers are looking out on their fields that are flooded or seeing nothing grow with fields looking like pictures of the Dust Bowl years of the 1930s, all a broker can do is to commiserate with their farmer clients and hope along with them that something breaks the drought.
The Minneapolis wheat market, spring wheat, is in a bull market. The Northern Plains over the past two to three months has had no rain or light scattered rains and high temperatures. Without rain, it doesn’t even help crops when temperatures have cooled down. Cattle producers are selling feeder cattle and cows because pastures are cracked and burned up and grass lands that would normally produce hay are barren.
From early fall of 2016, Minneapolis wheat traded sideways and farmers held last year’s wheat. As of the March 31st USDA Grain Stocks report, there was 24 percent more durum wheat stored compared to March 2016. On farm stocks, wheat farmers had stored on the farm, was up 83 percent compared to the same time in 2016.
A major reason farmers stored was the cash basis was wide. Even now with the prospects of severely reduced crops, cash prices remain wide. Soybean basis in South Dakota runs .75 to $1.05 under Chicago for new crop*, corn basis is .55 to .75 cents under Chicago December and Hard Red Spring, .55 to .75 cents under Minneapolis wheat. A farmer seeing their crops devastated and at the same time having a wide cash basis when charts clearly show an escalating bull market would be hard pressed to sell. Hope and prayers that prices go up to make up a part of the loss of yields will make a large majority of farmers want to hold crops.
CHART AS OF June 29, 2017 AT 9:45AM CENTRAL TIME
CHART FROM eSignal Interactive
But with most big moves in commodity markets, the largest traders, the traders that move markets, are speculators and often speculators that wouldn’t have the slightest idea of the differences between Chicago, Kansas and Minneapolis wheat, especially the formula and algorithmic program traders.
As of this writing, June 29, 2017 9:45AM central time, Minneapolis wheat is considered overbought. As of this writing, the Relative Strength Index on September Minneapolis wheat is over 95 percent. When an RSI is at this level, new sellers are not holding positions, and sellers have been liquidating rather than being knocked by new daily margin calls or seeing equity disappear. At 95 percent, markets can implode on themselves. Essentially the buyers have to sell to themselves and a market can fold within itself.
Naturally, a couple days of small setbacks can correct an overbought market, but when there are enormous potential profits to take, and when and if trading statistically slows down, remaining long can become as risky as being short.
At this time, I would not suggest selling Minneapolis wheat futures, but buying puts is a low risk trade to take advantage of an overbought market if there is a reversal.
With the USDA Grain Stocks report on June 30th at 11:00 central time and with farmers holding on the past report 83 percent of 2016 crop on the farm, it is easy to see traders taking big old stocks with the wide basis as negative news.
*Basis may vary in locations throughout the Northern Plains by .10 to .25 cents wider or narrower depending on location. Unfortunately for farmers in the Northern Plain states, the cash basis compared to other grain growing states is some of the widest.
Call me to discuss this trade and other trading possibilities and to talk about opening a commodity account with me. I use the facts, charts and leave the rumor trading to other brokers.
Give me a call to discuss your trading or email me with any questions or comments.
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