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Wheat blow off top?

Wheat had a very sharp rally this week, up over 50c from April 5-12 in the hard wheats and running to new highs. This was a huge surprise as crop conditions actually improved Monday by 3%, with Pro Ag yield estimates up 0.3 bu for winter wheat. Yet the market seems concerned with a return to a warm/dry weather pattern in HRW wheat including KS, OK, and TX.

So is this a blow off top, or with new highs is wheat going to run a lot higher in the coming few weeks?

Fundamentals and technicals are now working opposite directions, with the technicals turning higher on the new highs as momentum has clearly turned back in the bulls' favor. Money is flowing into the commodities, and wheat is now the golden child after the most recent week. Hot/dry weather is the talk of the CBOT in HRW country, but flooding in HRS wheat country is also getting plenty of media attention. Raging gold/silver (pushing through 25 year highs almost daily) helps to increase the flow of money into commodities, so why not buy some grains, too (they're plenty cheap). Perception is reality in futures markets, and the perception is that the US wheat crop is going to hell in a handbasket -- burning up in the south and flooding out in the north. And there is nothing better to own than commodities!

The problem is that fundamentals (and the reality known today) shows HRS areas are drying up nicely, with ND projected to have an average start date of Apr. 18 for fieldwork. That's relatively early in the northernmost state in the US, and most HRS wheat growers are excited about how nicely the warm weather is drying up fields (except for a 2-6 mile stretch along the Red River). Even flooded areas today may get in the field by May 1, as water levels are not expected to last long (not anything like the 1997 flood -- the real reason for media attention in 2006). If HRS wheat producers are looking at the best potential planting conditions in some time, where is the bullishness coming from?

HRW wheat areas in KS, OK, and TX had well publicized problems with winter weather, with hot/dry weather causing unprecedented declines over winter in condition ratings. Pro Ag yield estimates dropped 1.5 bu from last fall freeze up into winter, so there was damage done to the crop. But 1.5 bushel is only worth about 22c in the market, and over winter prices rallied $1 or more. Then rain fell in mid-March and reversed a lot of damage, with winter wheat conditions actually improving this week in KS and staying steady in TX/OK (a time when they normally decline). Very warm weather this week (10+ degrees above normal) will stress crops in these 3 states, but other soggy wheat areas (SRW and northern HRW/HRS areas) will actually appreciate this weather. Not only that, it will likely allow early planting of most crops over the next 2 weeks, including corn that overall might be negative grains.

By far the greatest fear of grain buyers in wheat is either freeze damage (usually the greatest damage is an April freeze) and a US wide drought. Obviously, neither of these concerns carry much weight today as most of the US replenished their topsoil moisture (and about half the subsoil moisture deficit) during March. Freeze is obviously not a concern on wheat in 2006 (hot dry weather in HRW wheat country the next week will almost eliminate this threat). So what could possibly have triggered the enthusiastic push higher in wheat the past week?

There's no doubt big specs are making big plays in commodities, but what play is it? Five straight days providing 50c gains in wheat is not typical of a market that can sustain that type of rally for very long, especially when fundamentals don't support it. Could this just be a blow off top? Are large specs giving wheat one more push higher to squeeze all shorts out of the market now, right before turning the market sharply lower? Usually futures markets make the most number of people wrong as possible, and with the recent break almost everyone knew the wheat rally had ended. Perhaps this is their way of reminding everyone else not to play in their sandbox? Or at least not confidently or comfortably?

In 26 years observing the markets, I've noticed a tendency for rallies to accelerate the closer you get to the top. Grains especially trade this way, as " ... tops last minutes, bottoms last months." The problem for traders is knowing whether we're at the end, or have a little more steam to blow off before the market top is hit. Sometimes steam blows for a while, especially with the funds applying plenty of heat (via their inflation hedges). After 5 days of higher closes, the first weekly close below the previous week should get you somewhere close to the top, especially at this seasonal time frame as wheat price peaks typically occur about now.

As for timing, by next week both HRS wheat and corn producers should be making rapid planting progress given the very warm/drying weather forecast this week (the same weather expected to stress KS/OK/TX crops). Bulls' problem is that this weather is not bullish all over the US, only in KS/OK/TX. In almost every other state, the forecast dry/warm weather given the plentiful topsoil moisture levels is actually quite bearish. What will we do if 50% of the corn and 75% of the HRS wheat is planted in great soil moisture by May 1? Winter talk about '70% chance of below average crops in 2006' might be ancient history, with the market talk changing to record yield talk instead. A lot of the bullish corn/bearish beans talk could also be erased as early planting could mean 1-2 million more acres of corn WITHOUT HAVING TO PAY TO GET IT (typical responses to early planting).

On the other hand, hot/dry weather limited to KS/OK/TX and cool/wet everywhere else (unlikely but possible) could get everyone a lot more excited than today. Especially considering the 2 billion projected ethanol corn use in 2006/07! And what happens to ethanol demand in 2007/08 if crude oil stays above $60 another year?

Keep on your toes this spring, as there is a lot of steam, heat, and money flowing in the grain markets you'll want to keep an eye on. Rapid changes can occur, so don't rely on the winter market talk to determine your summer market conditions as things can easily change (or have they already?)

Contact Ray Grabanski: rlg@progressiveag.com

Wheat had a very sharp rally this week, up over 50c from April 5-12 in the hard wheats and running to new highs. This was a huge surprise as crop conditions actually improved Monday by 3%, with Pro Ag yield estimates up 0.3 bu for winter wheat. Yet the market seems concerned with a return to a warm/dry weather pattern in HRW wheat including KS, OK, and TX.

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