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WEAT: Be Ready For Decline (NYSEARCA:WEAT)

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Source: Goodfone

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The Teucrium Wheat Fund (NYSEARCA: WEAT) offers investors un-leveraged direct exposure to wheat without the need for a futures account. Therefore, the decision to invest in this fund should be made after an analysis of the wheat market.

Source: TradingView

Seasonality

The current wheat futures price is well above the five-year average. More importantly, however, seasonality suggests a period is approaching with a likely decline in wheat prices. This period usually starts in January and lasts until March.

Seasonal wheat priceSource: VisualizedAnalytics.com

Wheat and Corn Spread

Compared to the first half of the year, the wheat price is now more balanced than the corn price. However, the spread is still above average.

Wheat and Corn SpreadSource: VisualizedAnalytics.com

US export

According to the USDA, the accumulated volume of exported wheat as of the third week of December, along with outstanding sales in the US, was 20.04 million tons. This corresponds to the maximum result for the last five years:

Wheat US exportSource: VisualizedAnalytics.com

At the same time, wheat is losing significantly to corn in connection with export rates:

Corn US exportSource: VisualizedAnalytics.com

supply and demand

Considering the dynamics of the USDA forecasts for the global wheat market (excluding China), it should be noted that the expected surplus in the current marketing year tends to increase (I do not take into account China as it practically does not involve the global wheat trade):

Source: VisualizedAnalytics.com

In the USA in particular, the forecast market balance remains roughly at the same level:

Source: VisualizedAnalytics.com

In the case of Russia, however, the expected surplus has increased by more than 6 million tons since May:

Source: VisualizedAnalytics.com

Hence, in the context of the changing dynamics of the equilibrium, the wheat market cannot be described as aggressively bullish.

Base price

In the wheat market as a raw material market, the price is formed on the basis of the balance between supply and demand. One of the most important characteristics of this balance sheet is the inventory-to-use ratio. In the long term, there is therefore a connection between the values ​​of the inventory-to-use ratio and the average price of the wheat futures.

The estimated inventory-to-consumption ratio of the global wheat market in 20/21 is 41.8%. According to my model, this means that the price of CBOT Wheat Futures is now around $ 200 per 1,000 bushels, or 30% above current levels:

Source: VisualizedAnalytics.com

If you look at the ratio of stocks to usage for the US market only, it can be said that the price of CBOT wheat futures is also above the balanced level:

Source: VisualizedAnalytics.com

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The Funds’ current net position on Wheat (CBOT) is neutral. Wheat is clearly not of interest to them. It is important to note, however, that the funds have been equally active over the past two months, completing previously bought contracts and selling new ones. In other words, their behavior suggests an upcoming bear market.

COT CBOT wheat

Source: VisualizedAnalytics.com

Bottom line

In my opinion the wheat market is overpriced. The only thing preventing a decline is the positive dynamism of the corn market, which has already grown quite strongly this year.

Of course, due to weather risks, you probably shouldn’t expect a sharp market decline. However, a corrective wave is very likely.

I believe the WEAT ETF will fall to $ 5.7 per share over the next two months.

Source: TradingView

Disclosure: I / we have no positions in the stocks mentioned and no plans to open positions within the next 72 hours. I wrote this article myself and it expresses my own opinion. I don’t get any compensation for this (except from Seeking Alpha). I do not have a business relationship with any company whose stocks are mentioned in this article.

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