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Wheat drops on bullish news -- A sign?

Wheat ending stocks were cut significantly in Friday's USDA report, with Australia production cut way down to only 13.5 million metric tons (the biggest change in the report). Yet with the tightest stocks since 1948/49 in the U.S. printed Friday, wheat prices have done nothing but drop since the report.

When bullish news fails to move the market higher, often it's a sign a top is in. Wheat hasn't given a strong technical signal yet that this has occurred, but already we are over $1.25 off of highs -- certainly far enough to confirm a potential top.

There are many analysts that suggest wheat has printed a multi-year top at the $9.50 area. That is always a possibility, but Pro Ag has seen some 2008 projections that show while wheat profitability is improved from last year, it is still lagging corn by about $20/acre (while beans lag about $50/acre) for total profits from land/labor/capital in 2008 plantings. In 2007 the advantage to corn was about $130/acre versus beans and about $120/acre over wheat, so while it is diminished significantly from last year, still an advantage exists in most corn belt areas.

Fringe areas might be different, but overall the excellent genetics of corn have made it a relatively attractive crop for many growers. USDA's report Friday shocked a lot of people by lowering corn yields from September when most expected a one- to three-bushel/acre hike. Apparently satellite images are showing enough poor areas to offset some of the good yields reported thus far. This kept corn production from expanding significantly, although USDA did hike acreage by over 700,000 acres.

The net result was a slightly larger production number in corn, but not as large as many expected. Soybeans experienced an acreage cut, though, and that pushed production estimates lower in beans (offset by higher carry-in). Cuts in demand were significant for corn, though, and net we ended up with a nearly two-billion-bushel carryout number, up 300+ million bushels from September. This is not a tight stocks situation for corn.

But soybeans are getting tight, with only 215-million-bushel ending stocks still projected, a cut of about 370 million bushels from last year (the equivalent of 9 million acres of production). We simply can't afford to see another cut in ending stocks next year from the paltry 215 million bushels, so the soybean market really needs to attract some of those corn acres back into soybeans.

As always, its up to price to do that work. Since we can afford to lose some corn acres to soybeans and still end up with a comfortable 1.5 billion corn carryout, its likely we will need to see at least six to seven million acres go back to soybeans. That would still leave us a little short soybean acres, so for now it still appears soybean prices will need to show some premium to corn in the U.S., and also cannot drop much during South American planting season as we need some increase in acres there (five to seven percent?) to meet demand.

Its curious that funds have been unloading wheat long positions all week in spite of the bullish report. Could it be that the funds see something the rest of us don't yet see? While this has led to sharp drops in wheat prices, corn actually moved higher last week along with soybeans -- the opposite direction of wheat. Wheat demand hasn't seemed to slow significantly, but someone thinks that wheat prices are high enough to allocate the short world crop at these levels.

Yet on the inflation front, crude oil has surged to new highs this week. Gold and silver markets still look bullish, and the U.S. dollar hasn't broken the downtrend yet that is well established now. Its hard to totally give up on grain bull markets with these outside markets still suggesting commodity inflation is alive and well.

But for now at least, wheat prices are implying at least a break in the grain bull market for now, and possibly at least a intermediate top for the wheat market. I receive many e-mails indicating wheat is all about supply now and securing the cash market wheat. But with funds unloading long futures positions for now, they still will have a lot to say about the overall futures price direction.

Wheat ending stocks were cut significantly in Friday's USDA report, with Australia production cut way down to only 13.5 million metric tons (the biggest change in the report). Yet with the tightest stocks since 1948/49 in the U.S. printed Friday, wheat prices have done nothing but drop since the report.

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