Wheat blows up the short
Wow! Wheat found some legs on Friday! After a big move lower on Monday, wheat spent the rest of the week chipping its way back to where it ended the previous week; but on Friday it surged past several resistance levels and blew out multiple layers of stops. The bear was certainly scrambling as the market just wouldn't break during the session and then pushed into new highs for the day on the close. Open interest declined every day last week, confirming the rally was short covering rather than new longs.
While there are some fundamentals that are positive in wheat, mainly serious planting delays in the northern Plains and some continued dryness in Ukraine/western Russia, at this point it's unlikely that those weather problems would be enough to sustain a rally. There are regions of Oklahoma, Texas and Kansas that have had flooding, which could certainly impact yields.
No doubt one of the main reasons for the updraft in wheat was simply that the funds were so heavily short, and when prices were able to push above one resistance level, especially last week's high, there was large-scale short covering from major position holders. It seemed that one set of stops rallied the market to touch off the next set of stops.
We also have to respect the spillover strength that the soybeans are giving support to the entire grain complex. A very strong demand base, primarily from China, along with a shrinking supply base has created a rationing market that clearly is not yet done. The interest from index funds in soybeans is very large, and when they buy the grain index, it includes corn and wheat as well. So, as long as the index funds want to buy soybeans, it will difficult for wheat to roll over as they end up also buying wheat by default.
That said, the seasonal tendency for wheat is to move higher into late April/early May, and then begin the long downtrend into harvest. In the near term, it does not appear that more weather problems are on the way in the southern and central Plains or in the Midwest (for winter wheat), and growing conditions have been quite good. We are in the window of the seasonal putting in its high; that window usually closes by around the May crop report, which this year is next Tuesday, the 12th. Being in a long term bear market, we should be ready for that seasonal high to come earlier than normal.
The Kansas crop tour starts on Tuesday, May 5. The many participants will have plenty to look at -first there were drought conditions in the Southwest, then we had frost, and now we have too much rain and flooding in some southern and eastern regions. The trade will no doubt be very interested in their daily findings and the final report on Thursday afternoon.
Technically, we're still in the broad trading range of the last few months. We'll see what kind of upside follow-through price action we get, and if further rallies in beans continue to support wheat, particularly as we get deeper into the month of May. I expect that we could hold together for another week or so, but that ultimately, we'll end up at least testing the trading range low again as we head into harvest with a good chance of seeing new lows in that time window, which is usually mid-June/early July.