Wheat prices continue to fight the progress in the US winter wheat harvest in light of expectations of adequate global wheat supplies and most importantly, a major commodity sell off. All in all the wheat market has been supported fairly well. Yes, it has been trading lower and it is under pressure, but losses in wheat fail in comparison to the $2.00+ losses experienced in corn and beans.
Overall wheat suffers from negative floor momentum, weak fundamentals, minimal interest and finally macro pressure. All three wheat markets are basically in the same position, but questions about the potential of spring wheat production remain. Technically wheat continues to chop around near the bottom end of the range lacking any reason to move in either direction. Do not expect to see anything besides muted short covering rallies unless corn and beans stabilize near these levels. The liquidation of commodity longs is still taking place. The liquidation in wheat fails in comparison because the funds in Chicago had established a net short position and funds in KC and Mpls had pared longs back to manageable levels prior to the break in the corn and beans. This action took place during the $5.00 sell off that took place this spring.
This liquidation phase may take a long time to complete. How long it takes to complete will depend primarily on whether or not these markets can maintain the current momentum lower. I believe the liquidation could continue into the second week of August as long as the weather stays favorable and we do not see a major increase in demand. Wheat will continue to gain on the row crops as liquidation takes place. As the winter wheat harvest nears completion the wheat market will likely experience a post harvest bounce. Many factors will determine the degree of a post harvest bounce. For example, progress on the global wheat harvest will quell any major rally. Whether or not, US exporters can sell wheat products will also be key. If the dollar does not strengthen dramatically, the US should be able to do its fair share of export business, but global supplies should limit the amount of frantic buying experienced earlier this year. Eventually the wheat market will be thrown into the acreage battle, which seems to start earlier every year. At current prices wheat and corn prices are fairly competitive. Beans prices are the most advantageous. This could change many times before decisions need to be made, but these crops really cannot afford to lose planted acres. Finally, Australian crop maturation will be watched closely. This crop appears to be in adequate shape right now, but precipitation is required in many areas in order to build subsoil moisture.
On a more positive note, there is some global demand for wheat. Japan has been a steady buyer of US wheat. Iraq, Pakistan, Jordan and Syria are currently or have been shopping for wheat of late. Expect most of this business to be sourced out of the Black Sea region or Europe. Harvest is under way in the Black Sea region and should move into full swing next week in Europe. Both harvests are expected to produce ample amounts of wheat. Of course, quality is in question. A few minor delays have been experienced, but quality problems have not developed thus far. Expect these countries to continue to be competitive in the export market.
Spring wheat conditions got a little bit better over the course of last week. The crop is rated 63% good/excellent. Conditions had deteriorated by 8% the prior week. The current conditions are 3% above the 1986 to 2007 average rating of 60%. The dry areas in the western spring wheat growing regions are expanding as the crop fills. Net drying is likely to continue over the next few weeks and rain after that may be too late. Some of this wheat is subject to potential light test weights, but only time will tell.
I do not believe the commodity bubble has burst. Recent price action was initiated by a fundamental sell off based primarily on favorable growing conditions. Weakness attracted additional technical selling and some forced liquidation. I view this price action as a great opportunity to lock in prices for needed commodities well into next year.
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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