Wheat continues its rally
The wheat complex brushed off the pre-Labor Day profit taking and quickly made new highs, as the new week started amid continued strong demand and withering prospects for the Australian crop. The southern hemisphere crop still is struggling to grow under hot winds and disappointing rains.
We got the word just before the holiday weekend that India did purchase much more wheat than they were originally offered, taking 795,000 MT at roughly $389/MT. Plus, they announced that they'd like to buy even more. After the holiday, Egypt also purchased 470 MT wheat; Iraq was close behind for 200 MT and Algeria for 500,000-700,000 MT.
Not only are the buyers still coming for large quantities, but we're seeing hard red winter get an increasing share of the business. This explains why Kansas City futures are gaining on Chicago, finally narrowing the spread that went to all-time lows when Chicago led the way higher. The buyers aren't shying away from US wheat at all-time highs. However, they are fearful to enter agreements with Russia, as the Russians debate export restrictions because of rising bread prices.
The EU's market has been more volatile and seen higher prices than the US, as buyers there scramble to find adequate feed supplies. With no government stocks to draw upon, the EU is contemplating a number of remedies for their grain shortage, which is adding to the price volatility. They are considering reducing the import tariff for wheat, but supplies are tight around the world, not just in the EU. They are releasing the 10% acreage set aside, which they estimate will result in a 20% increase in wheat production. They are considering allowing more imports from Eastern Europe, and some have even dared to mention allowing GMO products into the country, but that is unlikely to happen.
The market's attention has turned decidedly onto Australia, and rightly so. The world desperately needed a good crop from them and those odds are decreasing by the day. Anticipated rains have failed to materialize as the crop enters critical growing stages. Production estimates continue to decline, and that is forcing buyers who would normally wait for that crop to step up with another round of purchases.
This is definitely a near-term bull market. However, as new crop futures for '08 and '09 have seen aggressive selling, even as old crop makes new all-time highs. The hedgers are much less fearful for those deferred crop years, particularly with the virtual guarantee of a big increase in acreage worldwide. The strength of the old crop isn't enough to offset the selling pressure of new crop, and I would expect that to continue.
This market will likely just continue to push higher until we can really quantify Australia's crop. Further yields reductions will push prices higher until the demand says it's had enough. It does not appear we've seen that level just yet. Everybody knows that all bull and bear markets eventually end, but this wheat bull market has shown little sign of wavering despite it being a very mature bull market. We can only sit back and wait for at least some sort of significant break before we can even begin to think that the high is in.