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Adjusting Wheat Positions: Trading Strategies and Market Insights

This report details the current trading positions on MidAm Wheat and highlights key adjustments due to recent market activity. As of February 15, we have opened a new position, buying 1 MidAm May Wheat at $2.82 with a sell stop at $2.74½. The document outlines changes in open interest and volume indicators, reflecting trader activity. Additionally, it discusses the forecast of basis trends, influenced by local supply and demand dynamics. Understanding these factors is crucial for making informed trading decisions and optimizing profit objectives.

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Adjusting Wheat Positions: Trading Strategies and Market Insights

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  1. AGEC 420 • Today • Trading • Wheat position, new statement, adjustments ?? • New position ?? • Open Interest • Basis and storage

  2. Open Position - MidAm Wheat • Fri., Feb 15: Bot 1 MidAm May Wheat @ 2.82; Sell stop @ 2.74½ Close$ +/- Fri., Feb 15 2.81 ¾ -$2.50 Tue., Feb 19 2.83 ¾ +$17.50 Wed., Feb 20 2.85 ½ +$35.00 Thu., Feb 21 2.84 +$20.00 Fri., Feb 22 ??? Possible Actions Adjust sell stop; Set profit objective – OTO ??

  3. Volume & Open Interest • Volume • Number of contracts traded (i.e., bought or sold) in a specified period (usually a day) • Open Interest (OI) • Total number of contracts that have not been offset • Each open position has a buyer and seller – but just count one side for OI (see example, HW 2)

  4. What do Volume & Open Interest Indicate? • Volume Up and Open Interest Down • traders are exiting the market • if price is up ==> a “short covering rally” • Volume Up and Open Interest Up • traders entering the market • if price is down ==> bearish signal • if price is up ==> bullish

  5. Tracking Historical Basis • Usually tracked weekly • Grains – typically use midweek price • Wed. cash bid – Wed. closing futures price • Livestock – typically use weekly average

  6. Grain Basis • Nearby basis: Cash – Nearby futures • Example: Cash bid today in Topeka – March futures • Roll over to the May futures after 1st week of March • Deferred basis: Cash – deferred futures

  7. Salina, KS #2 HRW Wheat Basis

  8. Salina, KS #2 HRW Wheat Basis

  9. Salina, KS #2 HRW Wheat Basis

  10. Garden City– Nearby Wheat Basis

  11. Cash Price vs. Basis For Wheat • The Standard Deviation of Price is 4 to 5 times the Standard Deviation of Basis ==> Easier To Forecast Basis

  12. Basis: Seasonal Patterns Typically for Kansas: Basis weakest after harvest Most of the basis increase occurs by late fall Basis declines moderately through the winter

  13. Factors Influencing Basis • Basis reflects “local” supply and demand conditions relative to the overall market • If local supplies are very large, expect a more negative basis

  14. Forecasting Basis • Grains, 5 year average for the relevant time period • livestock, use 3 year average • Identify and use seasonal patterns • Examine high and low basis level to identify basis risk

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