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Wheat is in a correction period of bear market

This past week's price action in the wheat complex was similar to the last, with a sharply higher trade to start, and then no follow-through for the rest of the week. There was one difference, however, in that this time we saw a strong finish as prices rallied back up to the swing highs on Friday.

We've spent a lot of time just chopping around these past four weeks, managing to maneuver through February without much pain. As we head into March, I would expect that the focus will shift from the burdensome stocks, poor exports, etc., to something more interesting - like the growing season, and does Mother Nature have anything to say about this year's crop.

The change can't come fast enough, either. The bearish talk is growing ancient and tiresome; who doesn't know that stocks are big and we're getting pummeled in exports? But if the bears couldn't break the market in February, which is normally a weak seasonal time period anyway, then they might want to re-assess as we head into the new crop production season.

In the bigger picture, I still believe we're just in a correction phase of a long term bear market and that there's more pain coming in the next couple of years. But in the near term, this market could easily move higher.

I've long held that the 97-year low in winter wheat plantings cannot be ignored, even if carry-in stocks are big. Not to mention that a significant number of those acres went into dormancy in poor condition, particularly in the Midwest, and still could be torn out. Hence, the Chicago futures' reluctance to lose its par relationship with Minneapolis, something rarely seen.

I certainly can't predict a weather market, but it's rare that we don't get at least some sort of scare during a growing season. This year, any threat to yields will be magnified by the drop in acres. Even with normal yields, US ending stocks will be down significantly for '10/11 to a more manageable level of around 700 million bushels. With a yield loss, obviously that number can quickly move lower.

So, is my expected spring rally worth participating in? Yes, I think so. From a technical perspective, we should at least test November’s high, and very easily could go much beyond that level. For producers looking to replace cash sales, this is a good opportunity to get on board with some July calls.

In other interesting news, Russia continues in their quest for increasing production and export markets. They expect to complete their east coast port expansions by 2011, opening up opportunities to target the key Asian markets, which have long been a stronghold for US, Canadian and Australian exporters. From those east coast ports, they could reach South Korea in just one day, and Japan in two days. These Asian countries usually buy higher quality wheat, which Russia will be able to supply from their expanding Siberian acreage, which normally produces high-protein wheat. Their target is to sell around 3 MMT by the end of 2011, up six-fold from the 500 TMT they sold to South Korea, Japan and Indonesia in 2009. Russia reports that in just the last three weeks, they've already booked more than 500 TMT to that region.

As if competition from the Black Sea, mostly from Russia, wasn't suffocating enough for winter wheat, they will now go head to head in the higher value markets, long the domain of the US and Canada. Grain sales are not only a cash cow for Russia, but there’s a lot of pride in this for them as well. Years ago, they were the breadbasket of Europe, and they have repeatedly said they intend to regain their world grain market dominance.

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.

This past week's price action in the wheat complex was similar to the last, with a sharply higher trade to start, and then no follow-through for the rest of the week. There was one difference, however, in that this time we saw a strong finish as prices rallied back up to the swing highs on Friday.

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