Wheat prices have been battling against ample domestic and global supplies since last summer.  The fact that the size of the global wheat crop continues to grow is only one of the bearish factors as demand continues to be reduced.  

The USDA estimated all wheat ending stocks at 712 million bushels compared to 655 million bushels in February.  This is a much larger increase than analysts were expecting.  Soft Red Wheat stocks are estimated at 158 million bushels vs. 153 in February and 55 last year.  Hard Red Winter Wheat stocks are estimated at 278 million bushels vs. 248 in February and 138 million bushels last year.  Finally, Hard Red Spring Wheat stocks are estimated at 182 million bushels vs. 160 million bushels in February and 68 million bushels last year.  The stocks to use ratio has increased to a very comfortable level of 32.2%.  Last March the stocks to use ratio based on the 07/08 wheat crop was 13.2%.  Continued weak demand is illustrated by the drop in domestic food usage of 25 million bushels and a drop of 20 million in exports.  Additionally, imports were increased by 10 million bushels.

The fact that Hard Red Winter wheat crop in the southern plains has been going backwards has provided some support.  In the eyes of the market, increased stocks and sluggish demand will alleviate many of the concerns about dry regions in the southern plains.  The wheat crop in Texas is rated at 63% poor/very poor.  The wheat crop in Oklahoma is rated at 43% poor/very poor.  The Kansas wheat crop is currently rated at 22% poor/very poor, down from 15% the prior week.  Kansas is going to be the focus going forward.  If that crop continues to deteriorate, the market will continue to gain support from this story.  The market determined that Wednesday’s rain fall took place east of the primary wheat growing areas.
 
The USDA also increased beginning world stocks and production by a combined total of about 2 million metric tons.  I am more concerned with the 4 million metric ton decrease of total usage.  World ending stocks were increased to 155.85 million metric tons from 149.96 in February.  Additionally, the countries origination points that have been cheaper than the US for the past 6 months continue to offer wheat and some countries that normally have to import wheat are showing interest in doing some exporting.

Index funds remain long 132,000 contracts, which is basically unchanged from prior weeks.  Buyers should be concerned about the possibility of further liquidation of length by the Index funds.  Trend following funds were buyers on Tuesday on short covering and sellers on Wednesday.  The fact that they are short about 40,000 may provide support as the market anticipates a short covering rally.  Current fundamentals do not set the stage for a sustained short covering rally.  However, continued support from outside markets may provide enough momentum to sustain a short covering rally.  The bulls need the Index funds on the buy side.   

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