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Breaking below the low

11/18/2011 @ 2:34pm

Wheat markets finally broke below the early October low this week, something that seemed inevitable but took weeks to accomplish. If wheat is going to go into a trading range through the winter, which is what I think it will do, it looks like we have established the upside resistance; now we are trying to define where the downside support will be. With Friday’s reversal higher, it’s possible that we now have that as well.

Much of the downside pressure stemmed from another dismal week of export sales, not only for wheat but for corn, too. With strong corn prices also supporting wheat prices, it makes sense that if corn’s price is coming under pressure, it will drag wheat lower as well. Rains forecast for the central plains also added to the underlying negative sentiment.

It’s been several weeks in a row that wheat has registered poor export sales figures, and with large crops coming from every major exporter, we expect the competition to continue. However, corn exports were not expected to evaporate the way they have, especially during the fall when they tend to surge. 

Huge corn crops in Europe and Ukraine have found their way into markets that have long been a stronghold for US exporters, like Japan, South Korea and Taiwan. Even with expected tight ending stocks of corn here, if export sales stay low then stocks will build quickly. 

The interesting thing is that, even though harvest usually sees an increase in farmer selling, it’s actually been far less than normal which has supported domestic prices and been a key reason that exports have suffered. Domestic demand for corn has remained strong, particularly from the ethanol sector, which saw near record production last week.

So, despite wheat having plenty of its own fundamentals to trade from, the bottom line is that because feed grain demand is so high, and wheat is increasingly being used in feed rations around the US and the world, corn price action will directly affect wheat prices. 

We’ve also got the Australian harvest moving into high gear, with a near record crop about to hit the world pipeline. There have been some rain delays but certainly not as bad as they had last year. Quality supplies are a concern, however, as high yields in the west and east have lowered overall protein content. 

Argentina’s harvest is also picking up steam, and they’ve also begun to book sales. Typically, most of their excess wheat goes to Brazil, but the government has opened up the market for some smaller sales.

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