Sidwell Strategies Week-in-Review CommodityBuzz: Consider action on pre-harvest wheat bounce

Howdy market watchers! Its the last day of May, yes already! It was wheats week after a weak close last week. Say that a few times fast. In a shortened trading week with markets closed Monday for Memorial Day, KC July wheat managed a 4-day rally of 26 cents from high to low. Moving averages are always levels to watch for support or resistance. Thursdays break through the 200-day moving average despite closing below that level, but followed by Fridays close above was encouraging for another push early next week, news dependent. Next stop is the $4.78 level where the 50-day and 100-day moving averages converge. Harvest has started in southern parts of Oklahoma and weve heard mixed reviews. Some producers are talking of lower yields that have looked better from afar. Protein levels are said to be elevated in dryer areas, but still too early to call any of these observations overall average outcomes. News Thursday of lower EU wheat production helped spark the rally. While Ukraines exports are seen lower, SovEcon now sees Russias exports higher for next year. Ukraines Prime Minister this week said they will not restrict wheat exports by July to finish the marketing year despite the previously agreed export quota having already been met. As in regular fashion, I expect the same action may be taken by Russia as they also near export quotas for this marketing year. This we need to be cautious of as wheat prices reach those key moving average levels as well as other technical resistance levels on the charts. Recent rainfall has benefited parts of Russia that were formerly dry as has more rain graced Oklahoma and Kansas although far from what the forecast promised at the beginning of last week. It is getting closer to the time of year that continued rains will begin to impact quality and so further rains may continue to be supportive. As harvest nears, it is time to consider your plan once you have bushels in hand. If you have not protected prices with us on previous rallies, it is not too late as you still have price exposure. If youre planning to hold bushels after delivering to the most competitive basis bid waiting for the futures price to rise, it is still prudent to protect those bushels with put options or short futures. However, as Ive been promoting for years, a more efficient way to manage capital is by selling wheat across the scales at harvest and re-own the same level of bushels on the Board of Trade with call options. If the market goes up, the call options will gain in value, just as your wheat would have in storage, but for a fraction of the price. We will come back to this. If the price goes down, the most you can lose is the cost of the call option, say 20-25 cents for an at-the-money call, ie, equal to the level where the futures are trading. While we never want to lose money, 20-25 cents could be a fraction of the impact should futures as well as basis drop after harvest not to mention the storage that you incur by holding wheat at an elevator that can equal the 20-25 cent cost of the call option after just several months of storage. For example, if you hold wheat for 4 months waiting for the price to go up, you will still pay storage no matter if the price goes up or down. If the price goes up, it still has to go up more than storage in order just to breakeven. If it goes down, you both lose on the lower price as well as having to pay the storage. Thus, a lot of producers that I work with sell wheat at harvest, which has been around the highest prices in the past few years, and buy call options for the potential to realize upside should there be a rally, but do so in a calculated way to limit risk. From the capital efficiency perspective, if you hold 5,000 bushels of wheat at the elevator and wheat is $5.00 per bushel, that is the equivalent of $25,000 that is tied up in that stored wheat until you sell it. With the strategy described above, you can sell the wheat and spend $1,000-$1,250 to purchase the call option while putting the remaining $23,750-$24,000 in your bank account or towards your loan to stop interest or purchase inputs for your summer crops. Call if youd like to discuss this strategy in further detail and be ready to implement in your marketing plan over the next couple weeks. Remember, there is typically a pre-harvest and post-harvest rally. Be ready to take action by having your account open and ready to pull the trigger. There is still time to get this done before harvest. The corn market also managed to break out of its month-long range this Thursday as short covering helped fuel the rally. December new crop corn reached the 50-day moving average at $3.42 on Thursday while settling slightly lower on Friday. While coming in slightly behind expectations, corn planting progress reached 88 percent this week. The first corn crop rating was reported at 70 percent Good-to-Excellent, in line with the 10-year average season-starting conditions. Managed fund net shorts are now just over 240,000. What this market has not priced in as yet is any adverse weather. Should the outlook change in the coming weeks/months, weather premiums will come into this market. Low volatility at present means option premium is also priced low. Soybeans have had a difficult time breaking through its own 50-day moving average. With the Communist Party of Chinas passage this week of national security law over Hong Kong, tensions are rising to unforeseen levels between the once autonomous former colony of Great Britain. The ties between the US and Hong Kong are starting to unravel as China moves in and this will undoubtedly strain overall US-China relations in the months ahead of the election and for years to come. While we believe there is more upside in beans as COVID spreads across Brazil and may slow export shipments, US-China tensions may cap rallies. November new crop beans finished the week just above $8.50. After last Fridays neutral cattle-on-feed report, markets managed to pop Monday in a limit up move in August feeders. That rally fizzled as the week progressed and I believe the $139-level on August feeders will be tough to break through and before that the 100-day moving average at $136.80. Despite recent stability returning to this market, I believe the downside should be protected at these mentioned levels. Sign ups for livestock payments started this week. Be sure to followup with your local FSA office to apply. Give me a call at (580) 232-2272 or stop by our office to get your account set up and discuss strategies to protect your exposure to these markets. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place. Remember, I am on-site at the Enid Livestock Market on Thursday, sale day. Wishing everyone a successful trading week ahead!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com. Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.