Wheat Rallies Again

By Brian Henry, Archer Financial Services

Pay no attention to the fact that the SRW and HRW harvests are producing better than expected yields in many areas and quality, which may have been lacking early in the harvest, has been better of late. Forget the fact that most key spring wheat growing areas in North America have received beneficial rains and favorable weather. Finally, the export pace has slowed and US soft wheat is not competitive into the Middle East and Mediterranean, which happens to be the area currently looking for wheat. I concede that many areas have experienced harvest delays and may be subject to more delays over the course of the next week. This issue deserves attention, but we do not expect widespread yield loss or quality damage at this point.

The wheat markets remain resilient as the SRW and HRW harvests move north. Spring wheat, which is caught between short old crop supplies and a promising new crop production, remains a follower of the other two markets. Expect the price action in the Chicago wheat contract to continue to lead the wheat complex, regardless of whether or not the rally continues. Short covering and long corn/short wheat liquidation have been the primary factors behind the support in wheat the last few days. I can understand taking profits on the spread as it had moved from wheat $6.00 over corn to wheat $1.50 over corn before downward momentum stabilized. Funds are net short in Chicago, which indicates that upward momentum would generate additional buying. Traders will not put the focus back on spring wheat unless production problems develop between now and the late summer harvest. If the wheat markets continue to rally, expect spring wheat to continue to lose ground to Chicago and Kansas City.

Based on the recent performance of wheat, the futures markets looks poised to move even higher. The market breached key resistance at the 100 day moving average. The market had traded up to these levels a few times recently, but was not able to establish trade above these levels until today. Trade above these levels generated short covering and new fund buying in all three wheat markets. Recent estimates indicate that the funds are net short 25,000 in Chicago, net long 20,000 in Kansas City and between 5,000 and 6,000 long in Mpls. I guess this is as good of a time as any for funds to build long positions on technical momentum. From a technical standpoint, this market is not ready to be sold. I would let this market test resistance and fail, perhaps a few times, before I attempt selling. I would feel more comfortable selling, if the market had reached over bought territory. Selling is an aggressive move and could work if for some reason we go back to trading fundamentals.

I do not expect to go back to trading fundamentals any time soon. As evidenced by the activity in the SRW crop, the futures price continues to move higher and the basis continues to weaken. The actual value of the wheat has not increased as much as it seems. SRW export basis levels are 140 under the Chicago July contract. Interior basis levels are much worse. Once the harvest is over the basis will strengthen and perhaps the futures and cash converge. For all intensive purposes true convergence is a thing of the past. It may be due to the large spec trade or perhaps some other reason, but it does not happen the way it should. The lack of timely convergence does not restrict one from hedging, but it has changed the playing field.

The prudent thing to do for users of wheat and wheat products is to look to buy wheat near support levels. From the futures standpoint, I guess you have to look at the 100 day moving average as the first level of support. The market is not over bought just yet, but buying wheat during a mid harvest rally that is not supported by fundamentals is treacherous. If these markets continue to trade above the 100 day moving averages and you need wheat soon, going to the cash market is probably your best option. If you need to buy some of the better quality wheat or wheat product, I would look to the cash market right now.

If you are producing wheat and you want to sell some, buying puts or picking a day to take it to town are your best alternatives. Puts are expensive, but committing to a short futures position in this environment is tough to do. If storage is a problem, you’re not going to be very happy with the basis on SRW. HRW basis has weakened, but remains rather firm for decent quality wheat.

Do you have a question about this article? For a personal response within 24 hours, please email brian.henry@archerfinancials.com .

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