Wheat continues to search for a support level as the marketplace grapples with very large Global supplies.  It is not likely the USDA report, to be issued on Friday morning, is going to lend any support to the futures markets.  Good progress has been made in the spring wheat harvest over the course of the last week, but rains early in the week have limited recent progress.

The average analysts’ estimates for the 09/10 domestic wheat carry out came in at 773 million bushels, which is an increase from the 743 million bushel estimate in August.  I expect the increase to be predicated on the slow pace of export sales.  Expect the USDA to make any revisions to wheat production based on the size of the spring wheat crop in the Sept 30th small grains summary.  Regardless of where the actual comes in, this report is going to confirm that there are excessive supplies of wheat.  This by itself is not going to generate a considerable amount of selling, since the market knows supplies are ample and demand is questionable at best.  Soft red wheat needs to be competitive in the export market, but it also needs to fit into the domestic feed ration.  If the current corn crop does not suffer any major late season deterioration, there will not be a big void in the domestic feed ration.  In terms of domestic use, hard red winter wheat is going to find stiff competition from a large, low protein spring wheat crop.  Some of the 12 and 13% proteins will work into the domestic flour use at the expense of hard red winter wheat.  Spring wheat with higher protein content is going to have value going forward.  Expect the higher protein wheat to be stored, while lower protein wheat comes to town.  Many producers are or will be short storage by the end of harvest.  These low protein levels present a problem.  I do not know what one does with a train of 11.5% protein spring wheat.  It looks like it is going to have to find its way into the feed ration.  It does not fit in the blend market.  Only 13% protein and higher spring wheat is deliverable on the Mpls contract.  Perhaps it could be delivered in Chicago and KC, as those contracts do not require a specific protein level.  I doubt this will take place, but it may be the best way of handing the problem off to someone else.

Spring wheat producers made good progress last week as 58% of the crop has been harvested.  Progress was slowed by rains earlier in the week, but harvest has resumed in many areas today.  The forecasts indicate that there are chances for more precipitation over the next few days, although it is not expected to be heavy in most areas.  The harvest is about 10 days later than normal.

While wheat searches for a bottom, it appears the market is going to slide lower.  However, I expect this process to take time.  I also expect this process to include a few sharp short covering rallies to correct oversold conditions.  The market is currently oversold and due a short covering rally.  Do not expect substantial gains.  The only thing this market has going for it is the fact that trend following hedge funds continue to hold a record net short position in Chicago futures of about 75,000 contracts.  I do not expect the funds to be very quick to cover these shorts, but upward momentum could create additional buying.  If a rally of this nature occurs, it needs to be sold once it fizzles.            

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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