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The wheat market slide continues

Agriculture.com Staff 03/27/2006 @ 1:29pm

Well, the liquidation continues in the wheat complex with Kansas City still our leader to the downside. Heavy fund selling is still the story after the market's initial sharp break from the contract highs. The good news is that this price break has allowed the US exports to be competitive again. The bad news is that with more rain in the forecast this week, and downside targets still yet to be met, it looks as though wheat will have difficulty maintaining rallies at least for the near term.

Iraq purchased 250,000 last week and word is that they'll be for another 250,000 of new crop. That did little to slow the slide, but it was encouraging to see the business nonetheless. It was also encouraging to see the European Union once again with another week of export sales with no subsidies. The Ukraine reported that their wheat production would be about half of last year at 9 MMT, and that their exports would be almost non-existent at a meager 200 TMT for the year, compared to 5.3 MMT last year.

The spreads between KC and Chicago have also narrowed on this liquidation, since most of the longs were in KC and that's where most of the selling is. However, so far, those spreads are holding at lows of the last month. If prices continue to erode, but those spreads continue to hold, it could signal that the relationship between KC and Chicago has narrowed enough. Fundamentally, that spread should continue to hold a larger than normal premium throughout this crop and marketing year, and this break could actually be a buying opportunity.

The market expects crop condition ratings to improve notably this week, which will likely add more pressure to price action, particularly if the forecasted rains come to fruition. The Kansas crop will be off to an excellent start and could certainly make up for a lot of lost bushels in Texas and Oklahoma. That said, it is still very early in the growing season and a long way before the crop is made. Despite rain forecasts for this week, the longer range forecasts continue to suggest dry conditions for the plains.

For producers who have/are aggressively selling into this market, this sell-off could be an opportunity to buy some call options for upside protection just in case we get another round of dryness setting in or a late frost. There is no question that we need a good crop in Kansas this year, and any more weather scares over the next 6 weeks would likely send prices sharply higher.

The focus of the market this week will be Friday's spring crop plantings and quarterly grain stocks report. Even though this report concerns mostly corn and beans, spring wheat plantings will be closely watched; early expectations suggested that there would be a significant shift of spring wheat acres into soybeans, but with the recent rally in wheat, maybe that shift won't be so notable.

Technically, the momentum is definitely down but we could get minor short-covering rallies over the short term. Downside targets have become the Jan highs in KC May, and the Jan lows in Chicago. I think the market will be able to find longer term support at those levels, creating a buying opportunity for outright longs, and re-establishing the KC/Chicago spreads.

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Weather Trumps Demand