WHEAT PROFIT OPPORTUNITY by George Kleinman Editor, Commodities Trends June 13, 2006
Just as the days of cheap gasoline are behind us, the days of cheap food are numbered as well.
Today’s report focuses on an upcoming opportunity in the wheat futures market. I can see a window of potentially lower wheat prices in the next couple weeks, and my prediction is this window will open up to a dramatic profit opportunity.
Let’s start with some background.
Not all wheat is created equal. There are four major wheat varieties grown in the US, the world’s largest wheat exporter: hard red winter wheat (used primarily for bread), soft red winter wheat (cakes and pastries), hard spring wheat (breads and hard rolls) and white wheat (pita bread, primarily an export variety).
The winter wheat crop is currently being harvested. This harvest will continue during the coming four to six weeks. The largest (by volume) futures market, based in Chicago, is for soft winter wheat. This year’s soft winter wheat crop was very good. The spring wheat futures market, based in Minneapolis, is a smaller crop than the winter; it’s currently in the ground and will be harvested during late summer.
The hard winter wheat crop--the most important class for domestic use and exports--was poor this year. The futures market for hard winter wheat is based in Kansas City, Mo., and this is the market I’m targeting for a substantial price rise beginning in early July and running through year’s end. Here’s why.
Kansas wheat is primarily grown in Kansas, Oklahoma and Texas. Last Friday, the Dept of Agriculture released a crop report that confirmed what most of us in the trade already knew: Due to bone-dry growing conditions in the Great Plains this spring, the hard winter wheat crop was a disaster--the second-smallest yield in 30 years. Texas and Oklahoma combined will produce their smallest wheat crop in 50 years. And wheat production on a global basis is slated to fall sharply in the coming 12 months.
One would think that with the release of such bullish statistics the wheat market would have traded sharply higher on Friday. It opened nicely higher but closed sharply lower (although the majority of the loss was in the Chicago market, where the more plentiful soft wheat variety trades).
Why lower? This is typical during harvest. There’s generally more wheat available to the marketplace during harvest than at any other time of the year.
Those of you who’ve read my book Trading Commodities & Financial Futures are familiar with the “Voice from the Tomb,” passed-down wisdom regarding the seasonality of the wheat market.
The Voice from the Tomb tells us the optimal time to buy wheat is in early July. This date approximates a 50 percent completion of the national winter wheat harvest. The futures market anticipates the end of the harvest selling pressure by bottoming prior to the completion of the harvest. Clients who participate in my Voice of the Tomb trading program know the exact date in July when we’ll be buying wheat, as well as the profit and loss parameters. I also plan to flash a buy signal to Futures Market Forecaster subscribers for the December Kansas City wheat futures when the optimal time to do this is at hand.
Monthly Kansas City Wheat Futures 1993-2006
Commodity.com
Longer term, I look for Kansas City wheat futures to move quite a bit higher. I wouldn’t rule out a spike similar to the one in 1996--also a small-crop year--on the monthly chart above. There are limited alternatives for this variety, and food prices are somewhat inelastic. Unlike many consumer goods, bread consumption doesn’t decrease if wheat prices rise by 10 percent or 20 percent.
The weaker wheat price window is open and could remain so, perhaps for a few additional weeks. But I look for it to close--and create a profit opportunity.
