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Wheat Overprice, Put Options, Export Sales, Markets & Rain Days Update 5/6/22

Highlights


The Dow finished well over 1050 points lower yesterday as mortgage rates climbed and mortgage brokers and processors across the country continue to be laid off every day by the hundreds, if not thousands. The markets have no confidence that the Fed has inflation under control.


Inflation was why corn, wheat and beans were so strong yesterday morning before profit-taking set-in as the Dow crashed. Wheat managed to settle sharply higher on the continued world-wide panic that we will all run out of wheat. Dry weather in the US Southern Plains continues for the most part, but that is old, very old news. France’s wheat crop all spring was rated 95% good or excellent, but now a heat wave is expected there and the wheat buyers around the world have become suicidal.


If you look at last month’s wheat S&D we sent you April 9th (it is posted on our website), you can see there will be enough old crop wheat left over at the end of this marketing year to meet the domestic and export needs of the USA for 4 months and 10 days before we have to use one bushel of new crop wheat. The world is projected to have enough wheat to meet the needs of the world for 4 months 8 days. By those numbers, wheat is about $5 overpriced. The corn and bean carryovers are so small compared to wheat, they should be $20 to $30.


Andrey Sizov, the Black Sea grain market analyst asked Jagdish Joshi, an agriculture commodity market analyst of New Delhi, India about India’s wheat crop given that is all the market can talk about this week. Jagdish answered:

A few comments opposite to what market is talking. Weather was excellent till March. When heatwave started, more than half of the crop was already mature. In absence of the heat wave, there could have been record yields. Now, the yields are lower, but as for being bad, no.

As for the USA new crop export book, which commodities look bearish and bullish? Take a look:

Clearly, everything about prices from here on is about weather, a little bit about acres planted and whole lot about emotion. Get your wheat sold and puts bought. Keep your powder dry for corn and bean sales and put purchases.


 

Wheat Put Discussion

Friday morning for Market action on May 5th.

September wheat futures settled at $11.07¼ yesterday, up 28 cents. All puts should have lost value since the futures price was sharply higher.

The $10 put lost 7¼ cents while the $9.00 put was lost 4½ cents. A short futures short position lost $1,400, the $10 put lost $362.50 and the $9 put lost $225. The wheat in the field or bin gained about $1,400, because cash price = futures plus basis.

The past two days, the short September futures position lost $2,887.50. That means $2,887.50 was removed from the account of every trader who was short (sold position) September wheat futures the past two days.

Where did that money go?

It went into the trading accounts of every trader who was long (buy position) September wheat.

For each (long or short) 5,000 bushel September wheat futures contract, the owner of that account must maintain an equity of $3,850. With $2,887.50 per contract removed from the account the past two days, if the account equity is less than $3,850 per contract, the amount of money necessary to bring the account back to a net equity of $3,850 must be transferred to the trading account, usually the next business day. That is what is known as a margin call. A broker calls his trader client to tell him his margin requirement is more than the equity in his trading account. Therefore, he is on margin call to bring the equity back to $3,850.

The buyers of the put options also had money removed from their trading account, but they will never have a margin call.

Why?

They paid 100% the market value of the put the day they bought it.

The guys who sold and bought a futures contracts only paid $3,850 to show good faith they could afford the risk of price change on $55,000 worth of wheat ($11 times 5,000 bushels).

You can trade futures and never have a margin call also. In this case, instead of depositing $3,850 in the trading account, put $55,000 in the trading account to pay 100% of the value of the wheat. After all, when you have grain in the bin, it is 100% margined, you will never have a margin call, even if the price goes to zero. More times than not, margin calls convince farmers that they are wrong about the price outlook; your grain bin will never tell you that... Nor does the put option.

Trading wheat on margin is called leverage. To read how to make a lot of money with leverage as well as how to lose your farm with leverage, go to:

https://www.wrightonthemarket.com/post/leverage

Here are yesterday’s prices of the options we are following. The daily price changes make an interesting trail.


 

Weekly Export Sales Update



 

Market Data


This morning:

Crude oil is at $108.83, up $0.57

The dollar index is at 103.91, up 0.16

July palm oil is at 6,396 MYR, down 356. The contract high was made April, 29th at 7,229 MYR. Palm oil owns 36% and soybean oil owns 28% world market share.

December cotton is at $125.18, down $1.26 per cwt. The contract high was made May, 4th at $129.91 per cwt. Cotton competes with soybeans and corn for acres.

July natural gas is at $8.825, down 0.016. The contract high was made yesterday at $8.965. Natural gas is the primary cost to manufacture nitrogen fertilizer.

July ULSD is at $3.8330 per gallon, up 0.0126. The contract high was made yesterday at $3.9282. ULSD stands for Ultra Low Sulfur Diesel.


 

Rain Days Update


The Western Corn Belt has 9 less rain days in the 10 day forecast than yesterday and the Eastern Corn Belt has 5 less rain daysthan yesterday.


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