Agriculture has caught my eye, particularly one key grain. Today's idea has to do with a convergence of several different factors which have my attention for what may end up being a rather favorable long swing setup.
Big picture factors are playing a role with potential opportunities lining up in this space, such as more erratic weather patterns as both droughts and floods become more problematic.
The other factor is the role that the cost of hydrocarbons, particularly oil and natural gas, play in setting the price of food given their inextricable ties to industrialized agriculture.
"Farms consume energy directly in the form of gasoline, diesel, electricity, and natural gas, and indirectly in energy-intensive inputs such as fertilizer and pesticides." - USDA
The composition of this usage means agricultural producers are sensitive to both the direct prices of energy and as well the second order effects of price changes on other key products, such as fertilizers and pesticides.
This means that the rising price of oil, and to a lesser extent natural gas, may have a rather sizable impact on pricing for crops that are more energy intensive.
One area that has me fascinated by wheat is it's relative energy intensity, given the high expenses for fuel, fertilizer, and pesticides. In fact, pesticides are used rather aggressively during the harvest process of conventionally grown wheat for something called desiccation, whereas farmers spray enough RoundUp to send the crop into death throes such that it amplifies the yield.
Though I can't put the trade on with this basis alone. It's just the foreshadowing. A bit of an appetizer before the main course.
Unusual weather reduced China's wheat production, with heavy rains infecting crops and causing pre-harvest sprouting.
Kansas typically produces about 25% of the US winter wheat crop, but droughts have jeopardized yields. It is expected to be the worst harvest for the state in over 50 years.
Russia's wheat harvest pace has dropped 11% year-over-year
Ukraine continues to confront export constraints given Russia backing out of the agreement not to attack such shipments. Nevertheless, the country's crop quality has dropped due to lower usage of chemicals and fertilizer. The impact is much lower protein content.
A Reuters analysis of U.S. estimates of wheat inventories and crop usage for seven major exporters shows stockpile levels will dwindle to a 16-year low in 2023-24. Removing Russia, the U.S. and the EU drops the ratio to its lowest since at least 1960, reflecting tight supplies in important shippers like Australia, Canada and Argentina, the analysis shows.
The latest commitment of traders data for Chicago soft red winter (SRW) wheat shows managed money (speculators) increasing shorts as producers are flattening out forward harvest sales. A setup I like to see in any commodity before heading into a long as producers tend to be the smarter money.
The daily chart setup has a favorable risk-to-reward ratio. If we cross meaningfully below recent lows, I would exit the trade. That area has become a potential short-term bottom after being initially touched on May 31st and re-tested yesterday with a head-fake into a LVN that was rejected.
Of note: momentum remains challenged with RSI well below 50 and price below the 20-day moving average. This, to me, means conservative sizing in positions for any swings I take in wheat. Should these metrics improve, I would add to my position.
Should we move 4%+ above the 20-day moving average I will set my stop out on a close below that level. Similarly, I will do the same should we move 4%+ above the Ichimoku cloud.
I would plan to have the trade on for about 2-3 months, but if momentum is working in my favor I may keep it open for longer.
I don't have a firm upside target for this trade, but I would look for key areas of resistance around 642, 661, 708, 720 and 760 as potential places to start looking for an exit should momentum reverse lower.
The weekly chart illustrates how important the recent lows may be for putting in a short-term bottom in wheat. This is also why I don't want to see the level crossed below as that would tell me sellers enjoy a significant technical advantage.
Open interest in ZW has increased recently, but still remains rather low. This tells me that we can have large price movements due to less overall participation. Another reason I want to keep my position size small for my starter.
If trading agriculture futures isn't your thing, there is the WEAT ETF, but do be aware that these commodities ETFs often come with a K-1 partnership form that one has to account for in their taxes, which can be cumbersome if there are a lot of them.
As with any trade ideas, there is always risk. Please be sure to read the Disclaimer below and linked Terms of Use. If you have any questions or feedback about this idea please share them in the comments below or ask in the #questions room on our Traderade+ Discord server.