Wheat remains under pressure amid concerns about the state of the global economy and weakness in US financials, corn, soybeans and energies. The headlines continue to provide negative sentiment.

From a technical standpoint, wheat is once again oversold. In fact many commodity markets are oversold or quickly approaching oversold conditions. A modest short covering rally could occur at any point, but I do not expect a substantial move higher unless investment capital flows back into commodities. It appears a re-inflation trade was taking place until about a week ago. Trend following funds had been modest buyers, but turned sellers last week and continued to sell early this week. The Commitment of Traders report, as of Feb 10th, indicates trend following funds were net sellers of 5,200 contracts in Chicago, 1,200 in Kansas City and modest sellers in Minneapolis. Those sales put the net short position in Chicago over 30,000. At the 2008 low, trend following funds had a net short position of about 40,000 contracts. Further weakness will trigger additional fund selling, which will result in a short covering rally, but that may be weeks to months away. This is not going to help you very much, if you are bullish and have the position on. If you are bullish or become bullish and are looking for a place to put positions on, I would give these markets more room to the down side. Funds remain a net long in KC and Mpls.

On a more supportive note, Commitment of Traders Report, as of Feb 10th, indicates Index funds have continued to buy wheat. Index funds were net buyers of 2,400 contracts in Chicago and 1,000 in KC. Index fund activity in Mpls does not take place at measurable levels if at all. I believe the latter is true. Index fund buying will not support these markets, but if you are bullish, a little Index fund buying sure beats the alternative. Index funds, which are long only, hold a very large percentage of wheat open interest. Index funds hold approximately 135,000 or 34% of the roughly 390,000 open positions in Chicago wheat. At their peak, Index funds were long 220,837 on May 23rd, 2006. Commodity markets cannot take much, if any, additional Index fund selling. If there is a resurgence of inflationary fears, Index funds will continue to hold long positions. I will become more concerned about additional liquidation of Index fund positions if the wheat market trades down to the lows of December. A stronger dollar will likely limit the amount of Index fund buying, but may not be the primary factor that triggers additional selling. If they expect the current deflationary economic scenario to continue well into the future, they will liquidate a considerable portion of long positions.

Support from outside markets and grinding through the plentiful global supply of wheat are the keys to putting a floor under these markets. Outside influences have provided little help of late. I would not say any of these markets are ready to turn, but they may be getting to support levels. The crude oil market could use a blow out to downside. In terms of supply, wheat is trying to become more competitive on a global market that has gained more sellers. India expressed interest in putting some of its reserves on the global market. Russia has concerns about available storage as harvest approaches and frankly, they could probably use the money. Australia is ramping up efforts to export wheat. Meanwhile, the export market appears to have softened for the time being. US exporters will pay close attention to Brazilian intentions, as they will likely have to source hard wheat.   

If you would like more information on this article, please contact Brian Henry at 1.877.377.7965 or email at brian.henry@archerfinancials.com.

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