September 24, 2009
The wheat markets continue to chop around in a range just above the lows established in mid-September. The inability of the bears to press these markets through the recent lows has resulted in short covering. In spite of this, the fundamental outlook of the wheat market remains negative as global supplies are ample and demand is questionable at best.
I have been selling rallies in the wheat market for quite some time and it has worked, however, I have become much less aggressive over the last couple of weeks. The reasons for my change in strategy are many.
First off, the failure to breach the recent support levels indicates that many market participants are not willing to press the market near these levels. This does not seem to have much to do with the fundamentals of wheat. Wheat trading on its own merits would take out these levels and work down to a level that stimulates demand. To this point we have not seen take place. While I and my customers trade all three wheat markets, I have been keying off the Chicago December wheat contract, corn and beans. The fact that December corn does not want to challenge the lows of Sept 8th and November beans are not willing to breach the $9.00 level limits the chances of wheat trading to new lows at this point. We could certainly see the corn and bean markets work to new lows during harvest. The market has priced in very large corn and bean crops. While I expect the crops to be very good, harvest is the only real indication of how big these crops are.
Stock indices, crude oil and the Dollar Index have had little influence on these markets in the last few weeks. The dollar has been very weak, but Thursday's trade is a perfect example of how the agriculture markets have not been negatively influenced by higher price action in the Dollar Index. The same can be said for crude oil. The price of crude has fallen sharply the last few days, while corn proceeds to work higher. Perhaps there is investment capital rotating out of crude in the agriculture sector.
The last two factors are related to fundamentals. The global wheat trade will pick up as we move into the first of the year. The northern hemisphere wheat harvest is coming to close. North America, Europe and the former FSU countries have product to move. I expect many of these countries to be aggressive sellers. Expect to see tenders from the primary wheat importing countries to increase. While the wheat market has bounced, it certainly hasn't gotten expensive. Morocco tendered for 600,000 mt of US soft wheat and durum. October 7th is deadline on this tender. I would not be surprised, if Japan became an aggressive buyer of 14% hard red spring wheat. The domestic spring wheat crop is low protein. It sounds like the Canadian crop has better protein. Additionally, Canada should be able to offer some old crop spring wheat that meets Japan's requirements. The US will have to be competitive in the export market and that will limit gains. I do not expect the wheat market to make a big move higher. However, when the market is trying to build a long term low, it has to start somewhere. Perhaps this is the beginning of forming that low.
The domestic spring wheat harvest was 85% complete on Sunday. Some light showers were experienced, but temperatures remain above normal. A three of four day stretch of dry weather will bring this harvest to close. Some rains are expected early next week. There shouldn't be much spring wheat left to harvest by then.
Wait the current rally out. This will be an opportunity to get more wheat sold. We have not reached levels that would result in heavy fund buying. However, trend following funds have a record large net short position in Chicago. Efforts to cover even 30 to 40% of this position could take the market back above the $5.00 level. However, it would most likely price the US out of the export market.
If you would like more information about this article, please contact Brian at 1.877.377.7965 or email him at brian.henry@archerfinancials.com.
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