How High Can Wheat Go?

The above is a monthly chart of wheat prices going back to 1993. Notice the circle drawn around the (at the time) record high prices in the $7.50 range way back in 1996. Also notice how far and how fast wheat prices dropped through the floor. Are we set to repeat that same price action?

Quite possibly. Yes, there is tremendous world-wide demand for wheat, and that's set prices sky-rocketing to new record heights. The U.S. and Canada are among the few countries in the world that is experiencing a fantastic wheat harvest, and all the other countries are knocking on our door to tender purchase offers.

Once the buying is done and the harvest is complete prices almost always start falling. In the last few days there have been more stories that the wheat crop is coming in larger than expected, that Australia's drought isn't as bad as expected, and new seeding in Canada will be over double what it was this year. Therefore, I'm buying put options on wheat futures.

Last week we picked up a few Dec. $6.40 puts, and will adding more if wheat prices continue to move down from the highs. Wheat had two limit-up days this week, and finally profit taking and slightly bearish news sent prices downward Thursday, and in pre-market we're seeing prices down nearly four cents. I'm looking at all puts with a strike price from $7.00 to $6.40, and will also be looking at March '08 puts in the same strike range. These puts are quite a bit more expensive, but, like the Dec. puts, I'm looking for at least a five-time return on my investment.

The wheat market is still going to be a roller-coaster for the next month. I would not go short the futures just yet - those two limit-up days would have set your account down at least a total of $3,000 per contract - so options is the way to go. Strap yourself in - this is going to be a fun ride.

Energy Update:

Unless Israel goes to war with Syria, look for crude oil prices to come back down fairly quickly. There is still little in the way of hurricane news to disrupt pipelines. API/EIA oil, gas and distillate inventory data showed slightly larger drawdowns than expected, but that usually means next week's number will out-of-line the other way - meaning they will report larger inventories than expected, driving down prices.

I would still be a buyer of crude oil and RBOB gas put options.

For natural gas, however, I would start watching for signs of an up-move and look at going long or buying call options. Chesapeake Energy released a press release stating that it will cut production by about 6%. The company did not say why it was curtailing production, but the fact that natural gas is near its lowest point since September 2004 could have something to do with it. Look for other natural gas drillers to follow suit (just like the OPEC cartel!) With less natural gas being produced, prices will naturally begin to rise. Is it just a coincidence they curtail production as the heart of hurricane season arrives? Not likely.

I would look at the Dec. $9.00 natural gas call. It will set you back about $3,000, but the charts show $9.00 is a good area that natural gas was trading for the past few months. And, if it gets back to the $10 area, where it was during the early summer, you would make a very worthwhile return on your investment.

OJ Update

Nov. OJ futures set a new low on Wednesday, then bounced back to finish the day in positive territory. Thursday saw a slight up-tick, so we'll keep a close eye on this contract in case we finally found the bottom. We're looking at the Dec. 160 and Dec. 140 calls, which finished yesterday at .50 and .95 respectively.

I think a lot of the up-move was caused by the new tropical depression that is trying to form off Florida's northeast coast, but the maps show this would probably be more of a threat to New York than to the citrus groves.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.
Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.