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Wheat moves into a trading range

For the first time in at least two months, wheat has carved out a technical formation that could signal a bottom. The last one in mid-September quickly failed, but this one looks like it has a more solid base of support, not to mention a huge increase in open interest this week.

In Chicago front month futures, the slide stopped at last month's low, establishing a double bottom formation after holding those lows for two days. For Kansas City and Minneapolis, the slide actually stopped slightly above the October low, with both markets finding strong buying support along with the Chicago market.

Harvest in the Southern Hemisphere is getting into full swing. Argentina is reporting that their wheat production will be down 42% from last year at 9.5-10.5 MMT, compared to USDA's recent estimate of 11.0 MMT. Argentina has fought drought all season, with plantings down 23% and yields down from 16-24%. This will be their smallest crop since 1995/96. It just goes to show how quickly fortunes can change in the wheat arena; over the last two years of rotating crop disasters around the world, Argentina was one of the few major producers to escape unscathed. Now, with the rest of the world producing a record crop, they are seeing their own production problems.

Australia is ramping up their harvest as well, with some sales already on the books - some of which are old crop - go figure. There are now 19 licensed exporters in Australia, compared to just the one (Australian Wheat Board) for the last 60 plus years. There are reports of railcar shortages in some harvest areas, which may cause minor disruptions, but are not expected to evolve into anything serious.

There are also interesting stories coming out of the Black Sea region concerning exports and money. These reports suggest that some of the Black Sea countries are experiencing a severe cash shortage and would like to more aggressively export wheat to generate much needed revenues. However, exporters are having difficulty securing lines-of-credit which is sharply curtailing sales.

If these reports are accurate, it would be price supportive for wheat in the short term. However, in the bigger picture, those wheat stocks still need to be exported eventually, and the longer it takes to do it, the more the market will be bottle-necked with supplies down the road. The Black Sea region had huge production this year and if those sales get pushed into next spring, or worse, next summer, it could be a major drag on world prices as they clean out storage to make room for next year's crop. A grain union in Russia is proposing that the Russian government establish export subsidies.

Speaking of interesting stories, a week ago it was rumored that either Black Sea or Argentine wheat was headed to the U.S.; well, the rumor is still out there but now it's British wheat. Nothing confirmed, but the persistent rumors are a bit unnerving to say the least.

Also in the news this week were reports that China, along with their own $600 billion stimulus package, also repealed their export tax on corn and soybeans, and reduced the export tax on wheat and rice to 3%. It does beg the question, why would a country that supposedly still has a healthy 6-8% GDP need a stimulus package in the first place?

I look for the wheat market to trade in a fairly wide range through the holidays, with the parameters of the range the recent swing high and the major low from late October. Topside resistance for Chicago March wheat futures is the $6.08 level, with support at $5.18. In Kansas City March futures, look for resistance at the $6.40 level, with support at $5.48.

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.

For the first time in at least two months, wheat has carved out a technical formation that could signal a bottom. The last one in mid-September quickly failed, but this one looks like it has a more solid base of support, not to mention a huge increase in open interest this week.

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