Wheat prices have recently strengthened, supported by a surge in exports. However, the upcoming main harvest season is expected to boost supply significantly, which may lead to oversupply and downward pressure on prices. This dynamic presents a compelling opportunity for astute portfolio managers to consider a spread trade using CME Micro Wheat Futures.
Surging US Exports Provide Near-Term Support
Source: Karen Braun via X
Over the past two weeks, US wheat export sales for the upcoming marketing year have sharply accelerated, reaching a 12-year high. This surge is driven by a weaker US dollar and a front-loading of trade activity due to potential disruptions.
Source: NASS
In addition to strong export sales, weather-related concerns recently caused a dip in US wheat crop ratings. However, the overall rating remains at a multi-year high.
Strong July Harvest Likely to Pressure Prices
Despite short-term support, the longer-term trend for wheat remains bearish. Since 2022, prices have been in decline, driven by increased production from top global producers.
Source: PSD
With adequate supply, prices have pulled back significantly from their 2022 highs. Most recently, prices have dropped 11% since February amid expectations of strong upcoming supply.
The May WASDE report projects US ending stocks for 2025–26 at 923 million bushels, citing slower expected exports. Additionally, a Reuters report noted that Russia has removed its minimum export price recommendation, potentially making US wheat less competitive globally.
Large carry-in stocks from the 2024–25 season are also expected to reinforce favourable supply conditions, limiting the potential for a sustained price rebound.
Options Market Reflects Diverging Price Expectations
Source: CME QuikStrike
Between May 16 and May 23, open interest in SRW wheat options shows a significant increase in front-month call options expiring May 30. In contrast, later-dated contracts show higher put option activity relative to calls.
This suggests that while near-term prices may rise, the market expects a reversal as the harvest progresses.
Asset Manager Positioning Remains Bearish
Despite a brief period of short covering, asset managers continue to hold a broadly bearish stance on SRW wheat futures and options. According to a Reuters report, funds resumed net selling by May 22.
Seasonal Patterns Reinforce Bearish Outlook
Seasonal trends over the past decade show an average price increase of 1.5% in May and 1.9% in June, followed by a decline of 3.6% in July. While the timing can vary year to year, the general pattern aligns with the expected harvest-related decline.
Hypothetical Trade Setup
With fundamentals pointing to a strong harvest and longer-term bearish outlook, wheat prices may remain under pressure after the current rebound. Near-term support from strong exports and weather-related uncertainty is likely to be temporary.
Options market activity and seasonal patterns support this view. As asset managers begin trimming their net short positions, wheat may continue to rally in the short term before resuming its decline.
Investors can position for this view using a calendar spread in CME micro wheat futures, which are sized at one-tenth of standard contracts. This allows for a cost-effective way to express a short-term bullish and long-term bearish stance.
A spread consisting of a long position on the July contract (MZWN5) and a short position on the September contract (MZWU5) is highly capital efficient and requires just USD 31 in margin. A hypothetical trade setup on the spread is described below:
The overall position reward-to-risk is 1.43x.
This spread consists of a market neutral trade at inception and deviation between the price difference between the two contracts will lead to potential gains and/or losses. As such, the position gains when: (a) Jul contract rises and Sep contract falls, (b) Both contracts rise and Jul rises more than Sep, and (c) Both contracts falls and Jul fall less than Sep.
Conversely, this position will result in potential losses when: (a) Jul contract falls and Sep contract rises, (b) Both contracts rise and Sep rises more than Jul, and (c) Both contracts falls and Sep fall less than Jul.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Surging US Exports Provide Near-Term Support
Source: Karen Braun via X
Over the past two weeks, US wheat export sales for the upcoming marketing year have sharply accelerated, reaching a 12-year high. This surge is driven by a weaker US dollar and a front-loading of trade activity due to potential disruptions.
Source: NASS
In addition to strong export sales, weather-related concerns recently caused a dip in US wheat crop ratings. However, the overall rating remains at a multi-year high.
Strong July Harvest Likely to Pressure Prices
Despite short-term support, the longer-term trend for wheat remains bearish. Since 2022, prices have been in decline, driven by increased production from top global producers.
Source: PSD
With adequate supply, prices have pulled back significantly from their 2022 highs. Most recently, prices have dropped 11% since February amid expectations of strong upcoming supply.
The May WASDE report projects US ending stocks for 2025–26 at 923 million bushels, citing slower expected exports. Additionally, a Reuters report noted that Russia has removed its minimum export price recommendation, potentially making US wheat less competitive globally.
Large carry-in stocks from the 2024–25 season are also expected to reinforce favourable supply conditions, limiting the potential for a sustained price rebound.
Options Market Reflects Diverging Price Expectations
Source: CME QuikStrike
Between May 16 and May 23, open interest in SRW wheat options shows a significant increase in front-month call options expiring May 30. In contrast, later-dated contracts show higher put option activity relative to calls.
This suggests that while near-term prices may rise, the market expects a reversal as the harvest progresses.
Asset Manager Positioning Remains Bearish
Despite a brief period of short covering, asset managers continue to hold a broadly bearish stance on SRW wheat futures and options. According to a Reuters report, funds resumed net selling by May 22.
Seasonal Patterns Reinforce Bearish Outlook
Seasonal trends over the past decade show an average price increase of 1.5% in May and 1.9% in June, followed by a decline of 3.6% in July. While the timing can vary year to year, the general pattern aligns with the expected harvest-related decline.
Hypothetical Trade Setup
With fundamentals pointing to a strong harvest and longer-term bearish outlook, wheat prices may remain under pressure after the current rebound. Near-term support from strong exports and weather-related uncertainty is likely to be temporary.
Options market activity and seasonal patterns support this view. As asset managers begin trimming their net short positions, wheat may continue to rally in the short term before resuming its decline.
Investors can position for this view using a calendar spread in CME micro wheat futures, which are sized at one-tenth of standard contracts. This allows for a cost-effective way to express a short-term bullish and long-term bearish stance.
A spread consisting of a long position on the July contract (MZWN5) and a short position on the September contract (MZWU5) is highly capital efficient and requires just USD 31 in margin. A hypothetical trade setup on the spread is described below:
The overall position reward-to-risk is 1.43x.
This spread consists of a market neutral trade at inception and deviation between the price difference between the two contracts will lead to potential gains and/or losses. As such, the position gains when: (a) Jul contract rises and Sep contract falls, (b) Both contracts rise and Jul rises more than Sep, and (c) Both contracts falls and Jul fall less than Sep.
Conversely, this position will result in potential losses when: (a) Jul contract falls and Sep contract rises, (b) Both contracts rise and Sep rises more than Jul, and (c) Both contracts falls and Sep fall less than Jul.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Full Disclaimer - linktr.ee/mintfinance
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.