Recent price action has been somewhat encouraging to the bull camp. Wheat has not put in new lows, in fact the market has shown decent support at times. The market very seldom trades on its own merits and continues to lack direction. Volatility has come down. I expect to see volatility come down more as the holidays approach.

Wheat remains in a defensive posture. While the futures price, ideas about current and future supplies, and to some extent current demand change, the key factors associated with these prices have not changed a great deal. For good reason the market remains focused on fund activity and the pace of export activity. Strength or weakness in the US dollar will dictate these activities. Weakness in the US dollar would reduce the possibility of Index fund liquidation. Weakness also allows US exports to become more competitive. The US dollar remains in a bullish posture.  It appears the flight to quality, the driving force behind the recovery of the dollar, has lost some momentum. The dollar has to hold support in the range of 86. I believe the dollar will stay fairly strong through the first of the year and into the 1st quarter of 2009.

Expect the Index fund community to continue to reduce length as the market continues to trade in this range.  Index funds and trend following funds were net sellers last week and probably will be light net sellers this week. I do not expect the pace of this type of selling to increase unless the market falls to or below the lows of late October.

While the wheat market appears to attempt to bottom, US exports are not competitive into most areas. Keep in mind logistics do play a major role in the export market. Russia sold 50,000 mt to Jordan on their recent tender for 150,000 mt. It appears the price equates to $20 a ton cheaper than US soft wheat and possibly as much as $70 a ton cheaper than US hard wheat. US exports remain on pace to reach USDA’s 08/09 cumulative wheat exports. Total weekly exports had been down for a couple weeks in a row. Hard wheat sales have fallen off considerably, while soft wheat sales have shown a slight increase. This week’s export sales were within trade expectations at 511,000 mt. Japan was the best buyer and the hard wheat classes experienced a nice increase from the prior weeks. These discrepancies have been reflected in the tightening of the KC and Mpls spreads versus Chicago. Some of this correction can also be linked to the start of southern hemisphere harvest, which will increase the global supply of better protein wheat.

The wheat futures market is attempting to bottom. We have been through this process numerous times before. In theory prices come down and demand increases. Do to the link between commodities and the stock indices, lower wheat prices actually occur as more concerns about the economy become apparent. The wheat market is not going to bottom on its own. Record global production and concerns about future demand are not encouraging to the bull camp. Bounces resulting from profit taking and short covering do not have a lot of substance. I do not expect the wheat market to rally until the dollar shows some weakness and at least one of the outside markets confirms a bottom. At that point, I believe the market will experience a modest rally. The problem to the producer, especially the HRS and HRW producers, is the possibility of a considerable weakening of the basis. The futures may rally, but cash prices will likely lag any rally in the futures unless US exports increase considerably. 

Do you have a question about this article? For a personal response within 24 hours, please email brian.henry@archerfinancials.com or contact 1.877.377.7965.

This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of AFS is strictly prohibited.