While posting modest bounces periodically, wheat continues to trade lower.  The deck remains stacked against a major, sustainable near term rally.  Factors we have known about, such as the size of the domestic/global production, will continue to limit the possibility of a near term recovery.  The previously mentioned factor is understandable and perhaps measurable.

The factors associated with the current weakness in the global and US economies are very difficult to measure.  Additionally, the likelihood of further fund liquidation provides support to the bearish sentiment. Fund liquidation is coming primarily from hedge fund redemptions.  Continued liquidation may result in some buying coming back to the market as many trend following funds have been and still are net short.  I do not believe this type of buying can sustain a rally.  Regardless of the size of exports and/or the possible problems associated with the development of the wheat crop in the southern hemisphere, these factors will continue to limit the amount of buying in these markets.  Short covering rallies will continue to take place.  Basically, these rallies result in the market being less oversold and ultimately result in better opportunities to sell the wheat market.

Unfortunately, the wheat markets are going to remain followers of the stock indices.  I fear that this is going to continue until we see a confirmation of the stock market bottoming out and stabilization of the economy.  A factor that could limit the influence of stock indices on the wheat futures is the fact that staple commodities are relatively inelastic which will help the market revert back to trading on their own merits.  Another factor is the amount of liquidity that has been pumped into the economy.  At some point, probably in the last half of next year, this liquidity should create a very inflationary scenario as a portion of that liquidity will be invested in staple commodities.  The market will need this type of buying to sustain a major rally, especially if supply is not an issue.

It appears many buyers of hard wheat are willing to bid the basis in an effort to get cash wheat bought.  As long as they can get wheat bought at current basis levels they will continue to do so.  The current weakness in the economy and the possibility of this situation worsening will limit the strengthening of the basis.  There is no reason to buy excess wheat as supplies are adequate and demand remains a concern.  A further sell off in futures may strengthen the basis, but the price of wheat should not see a net gain.  Expect hard wheat basis levels to stay fairly firm.  As of Oct 15 the average basis bids calculated on HRS and HRW were 609.24 and 509.79, respectively.  SRW basis bids were a meager 344.67.

Basically, what we are left with is this.  For the near term, wheat will have a difficult time rallying on its own.  Buyers of cash wheat will be patient as the process of deleveraging commodity markets continue.  Purchases will take place, but there is little reason to chase the market higher at this point.  I expect most participants to keep positions small and try to stay close to even.  I expect buyers of cash wheat to favor bidding the basis over buying futures contracts.  I feel wheat has value near these levels, but I am not willing to stand in front of an additional selloff.  The possibility of futures continuing to selloff and basis levels firming does exist.  There is no reason to believe cash price and futures prices are going to converge any better at lower prices than they do at higher prices.  Therefore, we could experience a respectable strengthening in hard wheat basis levels.  The primary focus will continue to be on whether or not the US and global economies can stabilize.

If you have questions or comments about this article, please contact Brian at 1.877.377.7965 or email at brian.henry@archerfinancials.com.

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