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Fund-selling drops wheat

Another wicked week of selling across the grain complex sent wheat down to the early summer lows where some buying finally stepped up, despite the continued pressure in corn and soybeans. It was a week of worry for all of the world’s markets, and it doesn’t look like it will end any time soon. 

The selling in wheat came from a number of different reasons. Growing world stocks, intense competition from the major exporters and a huge crop coming from Down Under will keep our exporters on their toes for this marketing year. We’re also looking at the likelihood of a large increase in winter wheat planting with the crop insurance guarantee a whopping $1.50 higher than last year at $8.69 for hard wheat. Rains across the very dry southern plains, while a bit disappointing, were still welcomed and should give a boost to planting.

Selling from outside the grains markets was also very heavy. Funds were bailing on virtually everything in the commodities and equities. To see gold and silver sharply lower even when the stocks were sharply lower strongly suggests across-the-board fund selling, which is usually to raise capital. The credit downgrade of some French banks and the ongoing European debt crisis has sharply increased the need for the banks to raise capital. Funds who borrow money to finance their trading had to liquidate positions to raise cash, starting a downward spiral that just fed on itself. 

The stock market buckled and quickly tested summer lows as fears of debt defaults spread to all corners of the globe. The reality is that not only does the US have its own myriad of financial problems, it is deeply connected to Europe’s economic woes as well. The growing likelihood that there will be a Greece default, our own sluggish economy and the ongoing struggle in our own political arena are just a few of the things making investors weary. And they’re heading to the sidelines with massive waves of selling. 

There are some bullish aspects of the wheat market worth noting, however. The dryness in the southern plains is certainly cause for concern, but even if it stays dry (which it is forecast to do), prices will struggle to hold gains until we see actual damage, which won’t be until spring. 

We do see dry conditions in Argentina that has likely caused some yield declines, but that will be offset by a large crop coming out of Australia. If Argentina isn’t able to fulfill commitments to Brazil, we could see exports to Brazil increase, but we also know that Russia has access to that market as well. Ukraine is also experiencing some dryness as they try to get their winter wheat planted. That dry area has spread from central/southern Russia and certainly needs to be monitored. 

US exports have held respectably well, considering most of the Middle East and North African business is going to the Black Sea and Europe. Sales last week were better than expected at 695 TMT, a notable increase over the average of the last few weeks. We’re picking up a number of smaller sales even with a stronger dollar. If that continues, then possibly we’ll keep stocks manageable as we head into next year. 

Next Friday, September 30, USDA will release their small grains summary along with the quarterly stocks report. Early estimates from Informa suggest more spring wheat production declines, which was part of the support on Friday with Minneapolis gaining sharply on the other two wheat markets. Indeed, there could be lots of fireworks next week for grains, as we get a better handle on the frost damage, the spookiness of the financial markets and with the reports on Friday. 

Technically, wheat prices are back to the early July lows, which is a major support level. Prices held that level on Friday even as corn and soybeans were still pushing lower. This could well be a level that holds the market together, but we’ll have to give it a few days to get a better handle on that. If the stock market continues to get pummeled, then we could well see more liquidation across the commodity space; and wheat would likely get pulled further down. 

It seems like prices have been going down for a long time, but this is not the time to be selling wheat. It’s amazing when we see that it’s only been three weeks since the seasonal high was established. Kansas City and Chicago have both lost about $1.70 since the August 29 high; Minneapolis has lost $1.00. There will be a point when the selling stops and we’ll likely get a nice snap back that could easily recover half of these losses. That would be the rally to step up and sell again, but not here. 

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This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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