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Wheat breaks key support

Wheat markets hovered at trading range lows early in the week and then finally broke below those key support levels amid another round of fund liquidation that started on Thursday.

Hedge and index funds are seeing more customer redemptions, forcing them to liquidate positions during a time when trading volume generally decreases, thus magnifying the influence of the selling. The breakdown below the key trading range support suggests that there's another leg down just around the corner.

Fundamentals were actually a bit positive early in the week with Australia's harvest continuing to be delayed by rains, resulting in further downgrades to some of their quality. However, the onslaught of negative news on Thursday morning from export sales and Canadian production estimates pushed wheat over the edge and it never really looked back for the rest of the week.

Export sales were reported at a marketing year low of 208 TMT, reflecting the typically slow period during the holidays, but also suggesting that intense competition may be finally taking its toll. The Black sea region is still aggressively exporting wheat with the Europeans also stepping up their export registrations. This week, Egypt bought 120 TMT of Russian wheat at $163 FOB and 120 TMT of French wheat at $171 FOB, both of which were cheaper than US wheat priced at $180. Iraq continues to shop other sources, taking 100 TMT from Canada and 100 TMT from Russia and Germany.

European wheat prices this week dipped to 2-year lows, while the US is at 1 1/2- year lows. There are reports that Russia is running out of storage for their bumper grain harvest, which is part of the reason why they’re actually considering subsidizing exports - even though they're already the world's lowest price seller. The other reason is that they're short on cash and need the money - both in Russia and the Ukraine.

These lower prices are encouraging more tenders, particularly from countries that have been waiting on the sidelines for some time. Pakistan finally tendered for 500 TMT, and Morocco came in for 300 TMT.

Stats Canada released their production estimates on Thursday morning, with most numbers notably higher than trade expectations. Total wheat production is estimated at 28.6 MMT, compared to the 27.0 MMT expected, and represents a whopping 43% increase over last year. Canadian spring wheat production is estimated at 18.4 MMT, up 33% from last year; durum at 5.5 MMT is up 50%; and winter wheat at 4.6 MMT is up 88%. Canola production is up 33% at 12.6 MMT; and barley was up 7.3% at 11.8 MMT.

China reported that their total grain production for 2008 is up 5% from last year at a record 525 MMT. The Chinese government has been aggressively purchasing domestic grain supplies in an effort to support prices. It was also reported that they were importing a small amount of high quality spring wheat from the US which is not unusual and they are not expected become major grain importers since they're trying to find a home for what they already have.

The Russian government also has a purchasing program for domestic supplies; to date they've bought 2.2 MMT of wheat with a target of 5 MMT. They also plan to buy 3 MMT of feed grains. While government buying of domestic grain supplies may support domestic prices in the short run, eventually they have to do something with it. This tends to create a 'wet blanket' over prices as the trade knows that if supplies get tight, all they have to do is go to the government.

Technically, this week was pretty bearish for wheat. The trading range low was easily taken out without an effort to recover back into the range. This suggests that now we’ll see resistance at the old trading range low of 5.15 in Chicago March futures and 5.48 for Kansas City March. Downside targets will be the 4.25 level for Chicago and the 4.60 level for Kansas City.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. Futures and options trading always involve risk of loss.

Wheat markets hovered at trading range lows early in the week and then finally broke below those key support levels amid another round of fund liquidation that started on Thursday.

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