Wheat values continue to erode as the underlying fundamentals of these markets have changed very little.  Ample Global and Domestic supplies of wheat continue to weigh on a commodity that lacks aggressive buyers.  Additionally, the dark cloud regarding the possibility of a massive liquidation of index fund longs has once again moved to the forefront.  The market is due for a bounce to correct oversold conditions, but the lower trend remains intact.

In the opening, I stated that very little had changed in the fundamentals and I believe that to be true, with one exception.  The competitiveness of US wheat has gotten better.  Lower wheat prices and a weak dollar have allowed this to happen.  This is not a reason to get bullish, but it could continue to provide some support, if it continues.  Export sales are behind the pace needed to reach USDA objectives.  The business completed with Egypt for 120,000 mt of soft wheat on Wednesday is a decent start.  The US needs to continue to take part in these tenders and it appears lower prices are going to be required.

On Wednesday morning, the CFTC pulled hedge exemption letters on two different investment firms.  Hedge exemption letters are submitted when an entity is attempting to prove that it has a bona fide reason to build a net long or net short position that exceeds the speculative position limits.  In this case, the exemption letters had been approved.  The CFTC basically revoked that approval on Wednesday morning, at least in terms of their agriculture positions.  Initially, the markets sold off as participants expected or were concerned about the possibility of heavy selling based on this decision.  Order was restored fairly quickly.  The market has reason to be concerned about the possibility of this happening again.  More firms may have hedge exemption letters pulled.  However, it appears that these firms have already been notified of this possibility.  Additionally, it appears the firms are or will be allowed some time to become compliant.  While I am not a big fan of intervention, it appears liquidation of type can be done orderly.

The spring wheat crop remains in good shape, but cool temps and wet weather have slowed the pace of harvest.  Yields and test weights are good.  Protein seems to be lower than normal.  Better harvesting conditions will be needed soon, suggesting this year’s harvest is going to take time.  Short days and damp conditions do not allow for much day to day progress to be made.  The maturation of the Canadian spring wheat crop remains behind schedule.  It’s not going to catch up this late in the year.  An early frost or possibly even a normal frost would most likely cause some damage to this crop.  Although the yield loss may not be great, quality could deteriorate.  There have not been any real threats, but this issue is worth paying attention too.

Expect the wheat market to continue to work lower, with some modest short covering rallies.  The dollar will continue to influence price action in the futures market.  Trend following funds continue to hold a net short position of about 55,000 contracts.  Trend following funds in KC are about 2,100 contracts net long and 5,900 contracts net long in Mpls as of August 11.  Index funds were long about 165,000 in Chicago and 30,000 in KC as of the same date.  It appears trend following funds in Chicago are comfortable with this very large short position.  A rally of 25 to 30 cents would trigger some short covering.  I believe the market has to rally considerably higher to trigger large amounts of short covering.  The fundamentals do not support a rally of this nature at this time.  It appears an inflation based commodity rally will be required to take these markets considerably higher in the face of adequate domestic and global supplies.          

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