Wheat indicates reversal on higher import prices in Egypt

Between September 2015 and March, 2016, the Chicago wheat futures price had declined about 20% or $1 per bushel to trade at $4.425 per bushel. However, the global demand and supply data indicates that the wheat futures price has bottomed out and the price is about to take off.

The USDA (US Department of Agriculture) anticipates a record high inventory of about 1.18 billion bushels (32.1 million tons) for 2016-17. This high yield is balanced by a low yield in India. Due to unfavorable weather conditions in India, the yield is expected to decline by 13 million tons from the earlier forecast of 93.8 million tons. Thus, wheat futures prices are not expected to face further pressure.

Furthermore, the strength of the US dollar is expected to result in a decline in the export of wheat from the US. The Societe Generale had forecasted that the US shipments (2016-17) would be about 775 million bushels instead of the 850 million bushels predicted earlier by the USDA.

In Ukraine, the wheat harvest is expected to be only 17.8 million tons in 2016, compared to 23.4 million tons in 2015. A drought during the autumn seeding season has considerably decreased the forecast of the total yield for the current year.

In the meanwhile, the demand for wheat seems to be picking up. The grain authority of Egypt (GASC), which is the world’s largest wheat importer, bought 240,000 tons of wheat last week. The organization has put up stringent quality standards for wheat suppliers. Any consignment containing even minute levels of ergot (fungus, which causes hallucinations) is rejected by the GASC authorities.

Thus, considering the risk involved in shipping to Egypt, the exporters have started quoting higher prices in the range of $180 to $190 per ton. The quoted price is almost $10 per ton higher than the price at which 75,000 tons of wheat were recently shipped to Tunisia. Similarly, Iraq has entered the market to purchase 100,000 tons of wheat from Canada at a price of $236.50 per ton CIF free out basis. Thus, considering these facts, it can be understood that fundamentally the price of wheat remains range bound with bullish bias.

Technically, the price of wheat is near the major support at 460. The main line of the MACD indicator is above the zero level. Similarly, the signal line is about to cross the zero line. Thus, it is imperative that the price is going to head northwards. A crossover above $466 will take the price to $491 per contract of a bushel. The target price of $491 also equates to the 50% Fibonacci retracement from the highest (A) to the lowest price (B) level.

Wheat Price: March 21st 2016

A binary options trader should consider purchasing a one touch call option contract with expiry in the last week of April. A target level of about $475 is quite ideal for the one touch call option contract.

* 36.744 bushels of wheat = 1Metric ton.

** One wheat contract = 100 bushels

Charlie Harrison

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