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All eyes on Europe

Agriculture.com Staff 07/24/2007 @ 7:00am

The wheat complex is still stuck in a narrowing trading range, supported by record high European wheat prices and stress to the spring wheat crop here in the U.S., while being pressured by relentless selling in corn and beans.

With the winter wheat harvest in the final stages as they begin cutting in Montana and the far north Midwest, there is little hedge pressure showing up in cash or futures markets. Production concerns remain focused on the deteriorating spring wheat crop across Montana, western North Dakota and the southwest Canadian prairies, where days and days of intense heat have withered spring wheat.

In addition to weather stress here in the US, the Europeans are also experiencing continued problems with their winter wheat harvest, as persistent rains have been delaying France and Germany's harvests. Yields have already been reduced and attention is turning to declining quality as well.

The harvest problems overseas have pushed European prices to all-time highs, which have also lent a strong layer of support to our own price action. U.S. wheat prices have been able to fend off most of the spillover selling from another massive round of liquidation in corn and beans.

Demand has also lent a huge layer of support for wheat prices, as we continue to see unusually large export sales numbers consistently above trade expectations over the last several weeks. What's more, there appears to be little export competition, as a recent tender by Egypt garnered only two offers, that of the U.S. which got the bulk of the sales, and Russia which only got a surprisingly small part of the sale. With Russia's harvest still on the horizon, it's possible that they're just running short of exportable supplies for the near-term, particularly considering that some of their production region suffered lower yields this year, due to drought.

The continued weakness of the U.S. dollar has made us much more competitive overseas, and a decrease in freight rates gave us a leg up as well. The first quarter of the marketing year is usually the busiest for the U.S. and we are certainly making hay this year. It will be weeks before other Northern Hemisphere major exporters have their new crop available for sale - all of whom have had either production or harvest problems so far this year. Canada is experiencing the same heat stress as Montana and North Dakota; the CIS had drought in southeast Ukraine and southwest Russia, and now Europe is struggling to bring its crop home. Argentina and Australia have planted their crops and are quietly waiting and hoping for the good prices to stick around for another six months.

I have felt that wheat prices would have stayed strong until we got the U.S. spring wheat crop in the bin, and it's clear that wheat had the resilience to ward off the demons of corn and beans. The technical formations of the wheat complex do have the look of possible topping action, with large distribution patterns and head and shoulders patterns on some nearby futures contract months. So, with spring wheat harvest only weeks away, we need to be especially diligent in watching for selling signals. The critical support levels would be the early July spike low; if those are violated then most likely the major highs will be confirmed.

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