You are here

Wheat under pressure

Last week we talked about how wheat dropping on a bullish government report was
a bearish sign, and this week wheat followed through with more heavy
losses (2 limit losses in a row).

Wheat prices are down over $1.50 from
their highs already, and the charts show a lower high and a possible head
and shoulders top in wheat. Really there has been no significant change
in fundamentals from before, but apparently prices have gone up enough
where the market thinks it has solved the wheat shortage problem.

Argentina and Australia will be harvesting wheat over the next month, with
Argentina having a decent crop, but Australia suffering from another crop
disaster. Winter wheat in the US is just about all planted, with an
expectation that another 3-4 million acres were likely planted this year
in response to the higher prices. Double cropping of wheat with other
crops (soybeans mostly) has been rumored to be up as well. There are even
reports of southwest IA producers planting wheat with the intention of
double cropping with soybeans, a practice that would essentially mean the
soybeans are uninsurable in IA (not a double cropping soybean state). With
Europe dropping their 10% setaside and an acreage response due to improved
prices, wheat acreage should be up significantly worldwide.

On Friday, wheat prices were limit up on rumors Russia would raise export
taxes from 10% to 30-50%, but this week that was not confirmed, meaning it
likely was a political ploy before fall elections. Food inflation has
been getting the attention of voters, so proposals like this are popular
steps to stop food inflation in Russia. However, the Russians also like
to generate currency by selling at these high prices for wheat. So a lot
of grain has been moving from Russia into exportable locations before the
10% tax is imposed in November.

Ukraine is pursuing just the opposite strategy, taking off export taxes in
the near term to allow more selling of wheat. High barge rates are making
transportation costs soar, so the limited availability of barges is making
the cost to importing countries up even more than the product price. This
is also limiting demand finally in wheat, with sales and shipments finally
starting to slow down. But if Russia slows exports, it appears that might
free up barges to ship Ukraine wheat from the Black Sea.

New crop wheat prices so far haven't dropped much while old crop has
dropped over $1.50. In fact, Tuesday most wheat harvest 2008 forward
contracts were at their old highs. So the incentive to plant next year's
wheat hasn't waned yet. Perhaps that's needed, as wheat ending stocks/use
is the tightest ever for the world. We simply need to produce more wheat
next year, as the past 8 years consumption has exceeded production 7
times.

Corn is following wheat prices a little, but soybeans have shown
surprising strength as funds continue to buy soybeans while they are
liquidating their wheat positions. Apparently traders believe soybean
prices need to go high enough to entice the South American producer to
plant more soybeans. Early estimates are that they will increase acreage
5-7%, but many believe a 10% increase is needed to provide the cushion
needed for the world supplies to be adequate.

Soybean prices are remaining relatively firm in spite of losses in wheat,
and to a more limited extent, corn. Funds seem to be willing buyers of
soybeans, adding to their long positions recently such that index funds
own 830 mb Oct. 16, while speculative funds owned 573 mb. Together, these
speculators own a huge 1.4 billion bushels of soybeans, or roughly seven times the
current projected carryout. This is a potentially explosive situation in
soybeans at least until the world is certain we get hefty production from
South America this year. US growers will likely switch 5-8 million acres
of corn back to soybeans this year, but still we need more production from
South America.

Funds also own a net 2.29 billion bushels of corn, and 1.145 billion
bushels of wheat as of Oct. 16. These are huge positions, and in spite of
liquidation of some wheat contracts recently, they still likely lost at
least 1-1.5 billion dollars on the recent break. To still own wheat after
such a huge loss indicates just how set on owning grains funds are. It
also indicates how little those positions need to change to push prices
around (in this case, lower). That's a scary thought for anyone who owns
wheat or needs to buy it, as funds have a great deal of power in today's
markets simply by the sheer size of their positions.

f you have questions about this column, call 1-800-450-1404 to talk to a
Progressive Ag representative, or email Kristi@progressiveag.com

Last week we talked about how wheat dropping on a bullish government report was a bearish sign, and this week wheat followed through with more heavy losses (2 limit losses in a row).

Read more about