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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 mmt (the biggest change in the
report). Yet with the tightest stocks since 1948/49 in the US 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 vs. 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 1-3 bu/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 2 billion bu carryout number, up 300+ mb from Sept. This is not a tight
stocks situation for corn.

But soybeans are getting tight, with only 215 mb ending stocks still projected,
a cut of about 370 mb 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 mb, 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 6-7 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 US, and also cannot drop much during South
American planting season as we need some increase in acres there (5-7%???) 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 US 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 emails 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 mmt (the biggest change in the report). Yet with the tightest stocks since 1948/49 in the US 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 vs. 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.

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