Bullish numbers prevail
Well, the crop report finally got here and it was not a disappointment. We were expecting bullish numbers and certainly got them. Plus, we got strong price action that held throughout the session on Friday. It was not the blow-off top we were fearful of, considering the strong rally we've seen leading up to the report.
USDA did indeed lower the hard red winter wheat production number to just 715 million bushels, about 40 million lower than the average trade estimate. They also lowered exports for hard red winter by 10 million, which is something we'll likely see more of as we move into the new marketing year beginning June 1. Hard red stocks will continue to be very tight, and with domestic usage relatively stable, exports will feel the rationing first and foremost.
Despite the bullish numbers strictly being for hard red winter, Chicago wheat rallied in step with Kansas City, thanks to a very strong corn market. The KC market may have lost some of its leadership for now, but once this wheat market has topped and the harvest pressure ensues, that leadership will likely re-establish itself. This wheat complex is at these lofty price levels because of KC, and given the fundamentals of soft red winter wheat, Chicago wheat prices appear to be overvalued. Having said that, if corn prices continue to move higher, they will be supportive to Chicago wheat prices.
Weather has suddenly lost its power for price movement, even though it continues to stay dry in the western plains, and we hear more stories of frost damage even into central KS. Seasonally, wheat prices tend to top right around this crop report and we are very close to our targets, so be prepared for wheat to falter at these levels and head down into the normal seasonal harvest pressure time period, which this year will be early because of the early harvest. Harvest lows will likely be in by mid-June.
There are numerous opportunities that are being presented in the grain complex, and these kinds of big price days are great for taking advantage of those opportunities. The spread between KC and Chicago has stabilized, but I would expect it to continue to widen as harvest progresses and the pressure of a large soft red crop come to the forefront. All of this is happening while we harvest a short hard red crop. The old saying of big crops get bigger and small crops get smaller could be the story with this year's wheat crop.
We also see the wheat/corn spread widen back out to historically high levels, and with the fundamental weakness in Chicago wheat and strength in corn, that spread looks like a good opportunity as well. And of course, there is the trade of just outright shorting the wheat market, not only for this year, but take a hard look at the '07 and '08 crops as well. Is $4.68 for Chicago Dec â€˜07 really a justifiable level or a selling opportunity?
Look for support in the KC July at Friday's low of 4.78 and then the gap formed on Friday at 4.725, which is also an old contract high. Look for resistance at Friday's high of 4.87, and then the weekly high of 4.95. In Chicago July, look for support at Friday's low of 4.00, which is also the old double top high, and then the gap from Friday at 3.925. Look for resistance at Friday's high of 4.11, and then the weekly high of 4.24.