Anyone in the market buying CBOT wheat for feed should do it during this current deflationary macro period and do it aggressively. End users should get their needs taken care of out into the future. Beyond the bullish demand side fundamentals, the money flow picture is locked and loaded for a massive move higher.
In the recent commitment of traders report (COT), commercial net positions are showing one of the greatest commercial buying panics ever seen in CBOT wheat. When they buy like this, there can be only one reason. They believe prices are going higher and future supplies will be less available.
Another COT money flow factor that very few pay attention to is the small trader net positions. Small traders are contrarian indicators as they tend to get record long at tops and record short at bottoms as they move in herd like fashion at the tail-end of trends.
Currently,small traders are approaching near-record short positions that have coincided with the last two major bottoms in wheat. This is a confirming bullish money flow factor to the bullish commercials that suggest all the speculative traders have already sold the CBOT wheat market and are vulnerable to a massive short covering buying spree.
Outside of going long the CBOT wheat market, two other opportunities exist. The first would be to go long wheat and short corn in a cross market spread. Cross market spreads always are risky but can be insanely profitable for those that have the stomach for the typical volatility that comes with this kind of trade. The other, and perhaps less volatile opportunity, would be a bull futures spread on CBOT wheat. That involves buying the March 2012 contract and selling the July 2012 contract.
The early August spread level near -30¢ represents a historically attractive entry point for a bull spread. The July low of -52¢ goes back at least 35 years, a period that never saw this spread go below -30¢.
Whichever approach you prefer, there is a historic bullish opportunity in wheat as there still is a great deal of selling because of the current sovereign debt concerns. Deploying spreads in the current volatile commodity environment will help provide a lower risk investment vehicle and lower margin requirements with plenty of time to have the bull trend in wheat come to life.
If history is any guide, the upside potential for both the long wheat/short corn and bull wheat spreads are outstanding.
Shawn Hackett, commodities broker and author of the Hackett Money Flow Report newsletter (www.hackettadvisors.com), is a nationally recognized agricultural commodities expert with more than 18 years of money management experience.