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Early week pressure subsides

Agriculture.com Staff 07/07/2008 @ 9:11am

Wheat markets had plenty of activity this week, despite being a short week. To start the week we saw heavy selling from a bearish plantings and stocks report and from the hedging sector as they caught up with an active harvest weekend. However, that seems to be where the pressure stopped, as the rest of the week saw prices chop their way higher from the Monday lows.

The plantings and stocks reports were also bearish for corn which buckled sharply, forming an island top on the charts. Corn proceeded to continue lower for just one day, only to see sharply higher prices on Wednesday because of a hot and dry weather forecast coming two weeks down the road in the Midwest. For as implausible as a hot and dry forecast sounds, considering fields are still trying to dry out in many areas and for as inaccurate as those medium range forecasts notoriously are, corn still found plenty of buying that actually rallied it right up to the gap, and negated the island top. Thursday was just a quiet, don't make any mistakes, day as traders wanted to get away unscathed before the long weekend.

Interestingly, very little hedging pressure emerged for wheat the rest of the week, despite harvest moving quickly along. Combines are in northern Kansas, finding much better quality wheat along with yields that continue to impress. Even northwest Kansas, which was still in the drought region, has seen areas of 40-60 bushel yields, proteins understandably high in the 12-16 range, and weights also impressive of up to 64#. Central Kansas was even better by many reports, with very few remarks about the scab problem that had markets concerned just a week ago.

Still, even with harvest in full steam and production better than expected, the market has found an impressive level of resiliency. One can blame it on corn's ability to bounce from any sell-off, or the ever-rallying energy market, or the ever-weak US dollar, or the ever-buckling stock market which pushes investment funds into commodities. Really, it's a combination of all of those and it doesn't look like any of those will subside soon.

The problem is that the cash wheat market is showing no such sign of resiliency, much less any rally power. With newly harvested wheat being dumped on the ground and cash bids disappearing, the basis has plummeted to new all-time lows for soft red wheat. This makes hedging very difficult for elevators and producers. It's hard enough to hold the margin on hedge positions because of the financial strains in a volatile market, but when the futures don't offer any real protection against a losing cash wheat position, hedging is not a very attractive option. It will be interesting to see if the CFTC draws any conclusions about this screaming divergence considering we are in the delivery period and last trading day is Monday?

Cash wheat prices for soft red are already competitive with corn in the southeast US, and are expected to remain that way for some time. It is also expected that the December wheat/corn spreads will also have to continue to narrow to move more wheat into feed.

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