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Wheat holds as corn and beans break

Agriculture.com Staff 07/21/2008 @ 9:16am

Go figure, wheat is still in its harvest and has the weakest fundamentals of the grain complex. But, when corn and beans go into a free-fall, wheat won't break and even sees a rally in some futures contract months? What gives?

The ability of wheat to be stable when its biggest pillar of support, corn, was in a meltdown just shows how much spread-unwinding and liquidation was taking place in the grain complex. A combination of much improved weather in the Midwest and a massive round of fund liquidation across the commodity complex took their toll on the corn and bean markets that just a few short weeks ago looked as if their stratospheric rise would never end. Wheat had been the short leg of very popular grain spreads, and the liquidation of those spreads brought significant buying support to the entire wheat complex.

Things can change quickly in these markets where no one is safe and outside influence is as influential as Mother Nature. Financial markets in upheaval, notwithstanding the late week updraft, forced many funds to liquidate positions to generate cash for the banks lending to them. It hit everything - energies, metals, meats, softs and grains. And it's probably not over.

Minneapolis did get a boost from, none other than, fundamentals… hot and dry conditions in the northern Plains and declining crop conditions lent an infusion of weather premium into the spring wheat market. That being said, spring wheat problems won't be enough to carry the wheat complex higher by itself.

On a positive note, export sales have been running better than expected. With all the competition expected from the Black Sea, it's encouraging to see that we still have some competitive advantage in Japan, Nigeria and Indonesia, who were the major buyers last week.

But, make no mistake, the competition is coming and it will get fierce as both Ukraine and Russia are deep into their harvest and both are projecting significant increases in exports this year. Europe is acutely aware that they're already losing sales to the Black Sea and are seeing their prices decline to be competitive. Not only does the US need to compete on that level, we still have to move a lot of bushels of soft red into feed channels even as corn prices drop precipitously.

That's why I continue to think that rallies will be very difficult to sustain, even if I'm surprised that we're getting rallies at all. Whatever the reason we’re getting them, they should be viewed as selling opportunities. Despite the seasonal pattern that often bottoms in July, with a record world harvest just about home and crop estimates getting bigger, the fundamentals are just too bearish to rationalize that we could get a prolonged rally in the near term - of course, assuming that the European harvest doesn't get tripped up with rain like last year.

Soon, the Southern Hemisphere will be our focus - with Australia at center stage again. The next significant impacts on price direction will be Australia, with Argentina being a notable player. We've seen increased plantings in Australia but a decrease in Argentina. Rains have come lately for both countries with above average rains in southern and eastern Australia for the first half of July, giving their crop a huge boost just as temperatures and evaporation decline. USDA has penciled in big production from Australia, and prices will be very sensitive to their production prospects during September. Argentina will also be a player but will likely be overshadowed by Australia.

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