Wheat is the market leader
Wheat Fundamentals: We begin with the leader. The investment community's interest in the wheat futures is very strong on news of a shrinking Australian wheat crop, Ukraine planning on curbing exports, Iraq and Egypts renewed interest in USA supplies as represented by its purchases this week, with only a small amount of bearishness imposed by improving wheat weather conditions in Argentina. By Monday, it was estimated the funds came into the week long 20,000 contract of wheat vs the week before level of neutral (neither long nor short its overall position).
Going into Monday's trade, it was estimated the funds' overall position was 41,000 contracts long and added an estimated 2,500 contracts during today's trade. Just how many more longs could the funds add to its position is a commonly asked question since the beginning of this week. We reference our custom CFTC/Price report within our website and research shows, the funds have peaked at 50,000 net long. The first time was in late 2003 early 2004 when world stocks to use were tight corn, beans and wheat (presently projections are tighter for 2006-07 but only for corn and wheat) and then again this last summer when the USA had a small crop because of bad weather. We would suggest it would not be unreasonable for funds to add to longs into the 50 K level but if traditional Australian wheat purchases by foreign buyers to come more apparent by switching to USA supplies, funds could take out this double top of 50 K net long.
When looking at the supply for Australia 'then and now', present production estimates for the 2006/07 crop range from 12 to 15 MMT, far below present USDA estimates calling for 19.5 MMT. The harvest of 2003 yielded 10.132 MMT as a result of the worst drought in 100 years. The year began with over 8 MMT of carry in stocks, had far less than normal exports and exited the marketing yr with only 40% of the stocks it began the year with. How similar 2006/07 is in appearance, beginning with 8 MMT of carry in stocks, likely to see export potential cut in half and expected to end the year with just over 3 MMT of end stocks and not the 4.5 MMT projected by USDA. Of interest is the imports most years have been 75,000 tonnes with the exception of the strain of a shorter than ave crop had on the country and had imports of 286,000 tonnes. In summary, it is not out of the question such a rumor could be bantered about on the trade floor. We do believe it is important for the world to understand what potential levels of imports could be vs random guesses.
Troubled Exports: You are well aware of the fact that the sales pace this marketing year for wheat exports is down 23% vs last year and 27% behind the three yr ave. As of Thursday sales have reached 387 mil bu vs 530 mil bu 3 yr ave. In the bigger picture, first quarter wheat export sales are down 21% vs last years first quarter sales. The weakness ties 1990-91 at down 21%. There is hope for a comeback to finish 2006-07 strong and actually have the ability to meet USDA export target of 900 mil bu. Dating back to 1987 we found three unique years where sales were at or very near this years weak beginning. In 1990-91 export sales performance was down 9% for the 2nd through 4th quarter but still managed to sell 1.049 bil bu. Two other specific years had 2nd through 4th quarter sales outperform yr earlier levels by 21% and 4%, both exceeding 970 mil bu. If we use the ave performance of the three specific years 2nd through 4th quarter performance and apply it to 2006-07, projections suggest at the end the USA could have enough resilience to sell 904 mil bu. USDA's 2006-07 marketing year target for wheat sales...900 mil bu. If we use the weakest historical performance of down 9% it suggest sales of 826 mil bu and if we use the strongest 2nd through 4th quarter performance it suggest sales of 990 mil bu. There are some very early preliminary signs suggesting demand is looking away from Australia and more towards the USA. As long as weather keeps wheat production under stress for Australia, sales of USA wheat are expected to pick up some lost ground and help to support futures prices.