Spike highs end big rally
Wheat markets surged to a 4-month high last week, well past the first major resistance levels and much above the previous week's spike high. But, this rally too ended with a spike high formation on Friday after a sharply higher open that quickly faded early in the session and found additional buying into the close.
It would appear that at least a short term high is now in place, particularly considering we're nearing the end of the normal seasonal time window of late Oct/early Nov. If this high will be retested before a downward correction of the rally begins, it will be sooner rather than later, and we could expect it within 2 weeks at the most. Either way, we should get at least a few days correction after this swift rally.
The fundamental picture is potentially showing some changes as well. The very late harvest of corn and beans in the Midwest is making it very difficult to get the soft red winter wheat planted. We will likely see a significant drop in soft red acres and potentially a small drop in hard red winter wheat plantings as Kansas is also behind in their plantings.
While lower plantings aren't likely a long term game changer for wheat's overall trend, it can change the psychology of the complex for the short term. If nothing else, it can remove the persistent downward pressure we've been seeing throughout the summer and fall. This wheat complex has shown an impressive ability to rally in the face of very negative fundamentals, so it would appear that those fundamentals are well factored into the market.
This recent rally is likely the first leg up of a longer term correction of the major bear market from the high in 2008 to the recent low in Sep 2009. We could get choppy through the winter months but these recent lows should hold, and we should see one more strong rally as we head into the spring.
For producers who have sold cash, I think the upside offers enough opportunity to make it worth reowning those sales in the futures or options. Consider buying March calls and writing March puts below the major low to help pay for the calls. If this recent low is going to hold, then being short those puts should be a safe position.
The harvest in Australia will be in full swing in less than a month. Late rains there should be enough to bring that crop home in good shape. Several production estimates peg their crop in the 22-23 MMT range, about average if you don't count the major droughts. Certainly, Australia will be looking to the export market as soon as possible, and we can expect that world prices will feel their pressure as we get into late November and into December.
The markets is also keeping a close eye on the Black Sea region, which had a generally dry planting season and spotty emergence as the crop heads into dormancy. Recent rains could have helped the crop assuming it's warm enough to see some late fall growth. That region is famous for severe winters, so we will be watchful for potential winter kill issues, mainly in Ukraine and Russia.