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If wheat tops, what's next?

Agriculture.com Staff 09/20/2007 @ 8:17am

Grain prices have struggled a bit since the USDA report last week, especially with wheat struggling after a bullish report. While wheat prices tested those all-time highs again this week, the failure could be a telling sign of problems.

Especially troublesome is today's break given the Australian ABARE 17.5 mmt production forecast - smaller than most traders thought and considered bullish. Yet, wheat prices have sold off since that bullish news, with speculators willing to shed market length after a long, profitable run.

Wheat prices ran to $9 very quickly, adding $2 in the past 2 months as it ran to new all-time highs. Whenever prices start moving limit up for 5 days or more, it typically is a sign of a market top. That does appear to be the case, as when bullish news fails to push a market higher, typically a top is in.

So, if wheat markets have topped at $9, where does that leave the rest of the commodities? So far this year, corn prices have actually dropped about 10%, soybeans have traded up over 40%, and wheat prices were up almost 75%, as of this week. This is quite a change from last year, when corn was the story, and wheat/soybeans were the forgotten ugly sister. Now, we're not comparing $4 corn to $5 wheat and $6 beans! It's $4 corn as compared to $8 wheat and $9 soybeans, and that's a lot different story. While wheat prices could top here, they are so much higher than corn or soybeans (and more attractive to growers to plant for 2008), that wheat prices' demise might not necessarily mean a demise of the corn and soybean prices, too.

Take an inventory of grains for 2007, and here's what we find.

1) Wheat crops in 2007 were below average across much of the world, with problems especially in Europe, the US, Canada, and Australia providing the impetus for new all-time highs.

2) The US corn crop came through in flying colors, with Pro Ag yield models suggesting a near record large crop (159 bu/acre and still rising). So there is no crop failure in corn. In fact, US crops will be above average 'trend' yields of 152 bu/acre by quite a bit.

3) US soybean crops were also average or above average, with nearly 'trend' yields still suggested (USDA has hardly moved from their original trend yield estimate of 41.5 at the beginning of the year). Soybeans crops will be about average in the US.

4) US monetary policy remains expansionary, with a huge 0.5% cut in the discount rate this week by Bernanke's FED. There is a tolerance for inflation suggested here, and an aversion to economic recessions from the Bernanke FED. Look for the US dollar to continue its decline. This in the long run is bullish all commodities - the bull move started 1 year ago may not necessarily be over, even though wheat could have topped. Instead, the baton might just be passed from wheat to another crop (soybeans?) in the coming months, much as the baton was passed from corn to wheat in April, 2007.

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