Wheat experienced a very nice rally on Wednesday followed by a sell off that was not totally unexpected.  Credit this rally to oversold conditions, Tuesday’s strength in the stock market indices and the recent sell off in the US dollar index.  Additionally, some short spec position holders had their feet held to the fire for awhile on Wednesday.

While these factors are supportive, the market proved that you cannot go from cold to hot in the course of one day.  That being said the wheat market does have something to build on.  The problem is domestic wheat was not competitively priced into the Mediterranean or Middle East before Wednesday’s session.  It appears Egypt bought 120,000 mt of Russian wheat overnight.  The Jordan tender appears to have gone to Black Sea suppliers as well.  On a positive note these tenders are for last half of Nov and for Dec.  I have reason to believe we will continue to see a fair amount of tender activity out of this region.  A combination of lower prices, a weaker dollar and possibly weaker basis levels will be needed for US exporters to compete with exporters in the Black Sea region or EU into these locations.

Major exporters are going to continue to offer wheat on the global market.  The US should remain the largest exporter of wheat in terms of total tonnage.  However, US wheat, primarily SRW, has to be priced more competitively into the Mediterranean.  Hard wheat exporters will continue to do routine business into the Pacific Rim.  Japan has tendered for 96,000 mt of wheat for human consumption.  The tender indicates that they are looking for 48,000 mt of spring wheat and 14,000 mt of HRW.  Tender results should be known by Friday morning.       

Wednesday’s rally will offset anything that may have been gained by a weaker dollar.  Wheat futures can rally from these levels, but they cannot rally on their own.  As of Oct 21st, trend following funds held net short positions in corn, soybeans and Chicago wheat.  Additionally, it appears they held modest net long positions in Kansas City and Minneapolis.  Regardless of crop size, the size of current supplies or export activity, continued fund buying would support these markets for a few days.  Funds will continue to buy if the stock market continues to show some strength.  Forecasting the economy and gauging the duration of the recession will remain the primary market moving factors for most traders.  The influence of speculative money does not allow Ag commodities to divorce themselves from the stock market, crude oil and metals.  Strength in these sectors builds confidence in the US economy and strengthens the prospects of domestic demand for Ag commodities.

Besides the outside markets, wheat bulls are depending on corn and soybeans putting in harvest lows.  The recent strength in corn has put that market in a position to confirm a bottom.  Corn needs to show at least modest strength from these levels.  The close above 420 in the Dec corn contract failed to produce enough follow through buying.  The 20 day moving average is a key support level.  This level was breached, but the market managed to settle above this level.  On Wed many front month Ag contracts settled near or above the 20 day moving average for the first time since late August.  Failing to hold these levels brings the recent lows back into play.  Index fund selling may be slowing, but the prospects of index fund selling has provided as much resistance as the actual selling has.  If corn and wheat fail to hold recent lows, the prospects of Index fund selling will once again weigh on these markets.

Questions or comments about this article, please contact Brian Henry at 1.877.377.7965 or email at brian.henry@archerfinancials.com.


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