The May wheat rally took a breather on Wednesday, after 5 consecutive days of posting new highs for the rally.  Buying by both large and small speculators has been prevalent on the recent rally as new investment capital has flowed back into commodities.  Continued strength would trigger more fund buying, but longer term prospects remain negative.

As of May 5th, the Commitment of Traders report indicated that trend following funds in Chicago reduced their futures and options position by 13,800.  At that point, they were net short about 40,000 contracts futures and options.  They have continued to buy on modest breaks since that point.  Trend following funds in KC had increased longs to about 2,300.  Trend following funds in Mpls added about 900 contracts.  They are net long about 6,400.  The majority of this long position is in old crop contracts.

The USDA report released Tuesday morning projected a drop in 08/09 ending stocks to 669 million bushels.  This decrease was larger than the trade expected, but not exactly a bullish figure.  Additionally, world ending stocks for 08/09 were increased about 9 million metric tons to 167.  Finally, world ending stocks for 09/10 were estimated to be 181 million metric tons.  While these numbers may be in question, the fact that the world has ample supplies at this point is not.  These factors will continue to weigh on wheat prices going forward.

USDA reduced expectations for 09/10 US wheat production.  All wheat production was reduced by 70 million bushels to 2.026 billion bushels.  US winter wheat production for 09/10 was pegged at 1.502 billion bushels.  This is a reduction of 25 million bushels from the prior estimate.  This estimate indicates a 20% reduction from last year.  Besides the reduction of acres from last year, these reductions can be credited to multiple factors, including too much wet weather in some areas, dry weather in other areas and freeze damage.

The US dollar is trending lower, which helps the competitiveness of US wheat, even at higher prices.  Pakistan has indicated that they do not plan to export any portion of their 2 million metric ton surplus.  Concerns are growing in Egypt about the quality of some of the wheat that has been imported from Russia.  Officials in India believe they may be able to export as much as 2 million metric tons, although many analysts question whether an export program is viable.  They also believe subsidies will be required to allow this program to take place.  Others in the trade are concerned about the quality of some of the wheat in storage in India.

The wheat markets are overbought and are due for a correction.  Spring wheat planting progress has been made, but drier weather is needed in many areas of North Dakota.  Spring wheat will likely experience more support than the other wheat markets until the funds roll their large net long position to new crop contracts.  The general direction of wheat prices is going to depend heavily on fund activity and order flow.  Strength in outside markets will continue to support wheat, but I believe wheat could become the downside leader on an ag sector correction.  I am concerned about the possibility of inflation as we move forward.  I do not believe we are to that point yet, but the possibility is real and it may make it difficult to hold short positions into the fall.  I favor cash sales at comfortable, profitable levels or put ownership to manage risk.  Cash sales can be protected by buying futures or buying calls near support levels, if market expectations indicate that higher prices are likely.   

If you would like more information about this article, please contact Brian at 1.877.377.7965 or email  at brian.henry@archerfinancials.com .  

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