It's time to keep a wary eye on wheat

Jay Kaeppel

2024-05-16

Key points

Wheat has enjoyed a sharp runup in recent months
Could this rally continue? Absolutely
However, given the strongly cyclical nature of the agricultural markets, seasonality suggests being cautious in the wheat market

Wheat has had a strong runup

The chart below displays price action for wheat futures. After a long decline, wheat bottomed out in March and rallied roughly $8,000 in contract value into mid-May.

Could this rally continue? Of course. But there are two potential negatives to note. First, the 14-day RSI indicator was pushed into overbought territory near the peak of the latest rally. Combined with that, wheat is about to enter one of its weakest seasonal periods of the year. Given the highly cyclical nature of the agricultural markets, it may be wise not to ignore this.

Entering an unfavorable seasonal period

The chart below displays the annual seasonal trend for wheat futures, with the brown line representing the price action for 2024 so far.

Note the period highlighted in the red box, which extends from the close of Trading Day of the Year (TDY) #94 and extends through TDY #126. For 2024, this period extends from the close on 2024-05-15 through 2024-07-02.

How concerned should traders be about the potential for a reversal? Let's take a look at history. We can look at wheat futures data back to 1937. The chart below displays the hypothetical cumulative $ gain or loss from holding a long position in wheat futures only from TDY #94 through TDY #126 every year starting in 1937.

The table below summarizes wheat performance during this seasonal period.

What the research tells us…

A 28% Win Rate tells us that a decline for wheat during the impending seasonal period into early July is by no means a sure thing. However, all of the information above heavily suggests that traders employ a great deal of caution if choosing to play the long side of wheat in the months ahead. Meanwhile, while it is always perilous to countertrend trade into the teeth of a strong trend, aggressive traders may watch closely for an opportunity to play the short side in wheat.