Wheat futures attempt to work higher after being decimated last week.  Last week the Chicago March wheat contract experienced a high to low range of 90 ¾ cents, KC March experienced a high to low range of 80 ½ cents and Minneapolis March experienced a high to low range of 59 cents.  This week’s price action has helped to alleviate oversold conditions.  Fundamentals remain bearish.  Basis levels for decent quality wheat remain strong especially in Mpls.

The USDA issued the December Supply and Demand report on Thursday morning.  Few changes were expected for wheat.  The report was bearish for both wheat and corn.  Outside forces outweighed the fundamental bearishness of the report.  Both markets rallied.  The average analysts’ estimate for US wheat 08/09 carry out is 596 m bushels, which would be down slightly from the Nov estimate of 603 m bushels.   Estimates range from 575 to 606 m bushels.  The actual estimate came in at 623 m bushels.  Food use was reduced by 10 m bushels.  USDA estimated the World 08/09 carry out at 145.3 mmt in Nov.  USDA estimated 08/09 world carry out at 147.35 mmt.

The current rally appears to be technical in nature.  The wheat market has also been supported by generally higher prices in most commodities with most emphasis on higher crude and higher corn.  Obviously, the fact that the stock market has not gotten pounded this week also helps.  Corn and crude will continue to influence wheat trade.  Both markets are correcting oversold conditions.  Corn did trade lower to downside chart objectives late last week.  Crude is below cost of production for most producers.  Wheat will work higher if these markets stay supported.

Exports remain the weak link as EU and Black Sea wheat continues to be the primary competition.  There is no shortage of lesser quality wheat.  Australia will be competitive and Canada has wheat to export.  There are questions about the quality of the Australian wheat crop.  Rains have hampered harvest progress and damaged some of the production.  The extent of this damage is not fully known as harvest continues.  I doubt the futures market will make it much of an issue.  It appears there is plenty of wheat to go around.  Hard wheat exports have also been disappointing.  Some routine business is being done.  The hard wheat varieties will continue to draw interest from parties looking for quality.  Basis levels for hard wheat varieties should stay fairly strong unless futures in KC and Mpls continue to move higher.

The dollar is an important factor.  Weaker dollar trade results in higher wheat prices.  Currently, this pattern has not allowed US wheat to become more competitive.  The dollar broke through critical support at the 50 day moving average of 85.357.  Heavy selling pushed the dollar down through the Nov lows of 84.65.  I was expecting the dollar to remain fairly strong through the first of the year, but the flight to quality aspect of the dollar has faded.  Investors favored the dollar as the US is expected to recover sooner than the other established economies.  I am more focused on whether or not developing nations such as India and China will be able to increase their rate of economic growth.  Reaching the rates of growth they had achieved over the last few years will take time.  However, any increase in growth begins the process of changing the focus from demand to supply.  That type of growth creates a real demand for all commodities.

If you have any questions or would like more information about this article, please contact Brian at 1.877.377.7905 or email at brian.henry@archerfinancials.com.

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