The push higher in US wheat futures failed before the respective markets could reach and establish trade above the respective 100 moving averages. The move higher was impressive as the market continues to be adversely affected by weak economic factors, large global supplies and non-competitive US export prices.

The market had become overbought and was due for a correction. Fund buying had been the primary source of support prior to the USDA crop reports, which were issued on Monday. The catalyst for the sell off was bearish corn and bean numbers and a bigger than expected quarterly stocks number in wheat. Wheat feed usage was lower than anticipated. This factor increased ending stocks by 32 million bushels. Estimates for 08/09 wheat ending stocks sit at 655 million bushels, which would be the highest ending stocks since 01/02. Early selling in all agricultural commodity futures triggered large scale sell stops and profit taking, which weighed on the market throughout the session. Wheat could muster only a modest recovery in the Tuesday and Wednesday sessions. This midweek limited strength failed to gain traction as fund buying has been light and outside factors have provided some overhead resistance. Monday’s sharp decline in prices was damaging, giving the bulls plenty of work ahead of them. The front month futures contracts at three US exchanges are testing what appears to be rather light resistance at the respective 20 day moving averages. Establishing trade above these levels would be the first step toward building upward momentum and buying by trend following funds.

A few modestly supportive factors do exist, but their supportive influence is far outweighed by larger than expected supplies. The USDA estimates of 2009 winter wheat seedings indicate that Soft Red Winter wheat seedings will be down 25% from last year. Additionally, Hard Red Winter wheat seedings are also expected to be slightly lower than last year. The expected reduction of winter wheat acres is not a surprise to the market.  The current spell of extreme cold weather in the plains is also mildly supportive. Damaging temperatures will occur in many areas. However, many of these areas have some snow cover and some areas expect to receive more snow cover. These factors would be more supportive if not for the current domestic supplies and the inability to gage demand going forward.

Tender activity remains active and shows signs of continuing. US Hard Wheat business continues to be routine business into the Pacific Rim countries. Saudi Arabia bought 385,000 mt of Hard Wheat from Canada. I expected Australia to do some of the business. Any business done by the US would have been a gift. Soft wheat continues to find heavy competition from the Black Sea region. Questions about the overall condition of the Australian crop and the amount of available milling wheat in the Black Sea region remain.

Wheat can rally from these levels. I estimate trend following funds to be net short 8,000 to 10,000 contracts in Chicago.  Wheat needs corn and beans to find support after the recent selloff. I do not believe this going to happen anytime soon, but we need to find a bottom in this economy. At a minimum, this is going to take a few more months. The best case scenario is the economy bottoms at the end of the first quarter. The worst case scenario is the economy never bottoms and anarchy reigns. I believe we will have realized that the economy has bottomed by June. Of course the process of growing the economy will take longer. Fundamentals would indicate that lower prices are required to reduce current supplies. However, the US also missed out on export business at lower prices. As crazy as it sounds, our best bet may be based on competitors having a difficult time providing the quality required going forward.

Expect a trip back to oversold conditions, if the 50 day moving averages of 557 ¾ in Chicago, 584 in KC and 624 in Mpls are penetrated. Resistance in the Chicago March contract is at 585 and 602. Near term support is at 556 ¼ and 544 ¼. Resistance in the KC March contract is at 610 and 626. Near term support is at 584 and 574. Resistance in the Mpls March contract is at 651 and 667. Near term support is at 622 and 608.                                       

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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