An impressive rally came to screeching halt on Tuesday as the buying dried up mid way through the session.  Wheat tried to claw its way higher, but supportive outside markets had little effect on the price of wheat.  Once again the price of wheat has fallen victim to adequate domestic and global supplies and the fact that US wheat is overpriced in the export market.  Barring a major deterioration of 2008/2009 global production, bulls will be fighting this resistance for quite some time.  Ideas that trend following funds are going to cover shorts in Chicago and build net long positions in KC and Mpls have not materialized.

Besides outside market, wheat was also supported last week by the prospects of a couple of hard freezes early this week.  As so often happens in commodities, the event had been traded prior to occurring.  Temperatures in many areas of the southern plains did get cold enough to do some damage.  The amount of damage depends on the maturity of the crop.  Further advanced crops, such as those in Oklahoma and southern Kansas, are more susceptible to damage.  It will take a couple of weeks to determine the damage.  I do not believe it is going to be extensive.  Early estimates point to a possible loss of 25 to 50 million bushels; a small amount considering domestic all wheat carry out may be above 700 million bushels.  Many of these same areas experienced a hard freeze in 2007 and some damage was done.  However, the 2007 rally garnered much more support from a 4 to 6 week period of frequent rains during harvest in the southern plains.

The USDA will announce supply and demand estimates Thursday morning.  The market is looking for a slight reduction of the US 2008/2009 carryout.  The average estimate is 697 million bushels down from 712 in March.  By comparison the April estimate for 2007/2008 was 306.  Basically, the market will be comfortable with the available supply based on this estimate.  Additionally, recent rain and snow in the southern plains will help alleviate some of the dry weather concerns. Future rain, which is needed, may help alleviate some of the damage caused by the freeze.

Trend following funds appear poised to stay short Chicago and did not give any inclination that they are ready to build longs in Kansas City and Minneapolis.  The bulls are counting on a short covering rally in Chicago.  The rally of 55 cents experienced last week was a perfect opportunity to trigger a short covering rally by the trend following funds.  Perhaps they did cover some shorts later in the week as the rally progressed.  However, the Commitment of Traders report as of Tuesday, March 31, indicates that trend following funds were net sellers over the course of the prior week.  Trend following funds were net sellers of approximately 8,900 contracts.  As of the 31st, trend following funds are net short 40,700 contracts, futures and options.  As of the same date, trend following funds in KC reduced long positions by 1,000 contracts and increased short positions by 2,700 contracts.  KC flipped from being net long to net short 1,900 contracts.  Trend following funds in Mpls added 1,000 contracts, but remain net long about 2,600 contracts.  I expect funds did do some buying late last week, but much of that buying was probably offset by selling on Tuesday and Wednesday.

Index funds were buyers during the same period.  Index funds bought 3,100 in Chicago, which brings their current position to long 134,000 contracts.  This is a pretty small position for Index funds.  Index funds in KC are long about 25,600 contracts.

Front month contracts in Chicago and KC could not hold their 20 moving averages of, respectively 535 ½ and 583 ½.  This brings the $5.00 level back in play in Chicago May and the $5.45 level back in play in KC May.  Expect Mpls to work lower also, but this market is likely to lag the other wheat markets on the downturn.  The key level to hold in Mpls May is the $6.40 level.  I do expect these markets to work higher, but it going to take some time for that to develop.

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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