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Bearish on wheat prices

Agriculture.com Staff 03/15/2010 @ 9:35am

The trade was expecting more negative numbers from USDA in their supply/demand report recently, and they certainly weren't disappointed. USDA projects that 09/10 carryout will be 1.001 billion bushels, the first time in 22 years that US wheat ending stocks will be above the 1 billion bushel mark.

A 20 million bushel decline in food consumption was the reason this month that ending stocks were raised by a like amount. Even though exports have fallen behind again, those estimates were left unchanged at 825 million bushels, which in itself is a 38-year low.

Exports continue to be a serious drag on prices, with another purchase by Egypt going to Russia and the European Union. US prices were a good $38/ton higher than the winning offers, making it very clear that we're not even in the ballpark in that region. But the good news was that last week's export sales figure came in pretty strong at 448 TMT, at the high end of expectations. We may not be competing in the big sales, but a steady pace of 40-50 TMT sales do add up and are at least keeping us from drowning in our own wheat.

With as bearish as the fundamentals are, it would seem that wheat has no direction but down; but that just isn't what's happening. The market certainly has been feeling the negative pressure as it slowly worked lower over the last few weeks, and now sits at the Feb lows, and for some contracts we're at or breaching last October’s lows.

But the downward momentum has waned and the selling seems to dry up at those major support levels. We know that hedge funds are aggressively short, expecting the fundamentals to eventually break the market. But it will be difficult for wheat to continue lower when virtually everyone is already bearish.

In addition, we're just at the very beginning of the growing season that has a 97-year low of planted winter wheat acres. An increase in spring wheat acreage is already being questioned as snow still covers the majority of the northern Plains and profit outlooks favor other crops. And let’s not forget that much of the soft red winter wheat was in poor condition as it entered dormancy and could easily be torn out.

And trade chatter is finally turning to new crop with a renewed focus on the low plantings. There is also growing concern about the very wet conditions in the Plains that are preventing some producers from top-dressing fields and encouraging disease. Again, I think it's very important to note that we can't tolerate much yield decline with the low plantings base.

As we move into the second half of March, the weather will warm up and winter wheat growth will steam ahead. It is highly unlikely that dryness will be a problem anywhere in the central or southern Plains, or the Midwest for that matter. Even the normally dry regions of the panhandles and southwest KS are far wetter than normal - with more rains on the way.

Even though moisture conditions are more than adequate, I still think we need to give the market some room to the upside. Given the very large short positions held by the hedge funds, and the extremely negative sentiment among the trade, it stands to reason that there are very few people out there that are not already bearish. In other words, the boat is very heavily loaded to the short side; and as we enter into a new growing season already knowing that production and stocks will decline, it just seems prudent to give the market some room in case we get some surprise that motivates the shorts to cover.

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