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Louise Gartner: Wheat on the ropes

Wheat markets were lower every day this week, slashing another $1.14 off of front month Chicago en route to the biggest one-week decline in over two years. Just a short month ago, wheat was putting in two-year highs. Since then, Chicago May futures have fallen $2.22, a 24% drop. Kansas City May has declined $2.00, a 20% drop; and Minneapolis May has declined $2.05, also a 20% drop.

There was plenty of bearish news around this week. The China drought story is over, the wheat crop in the Southern Hemisphere was increased by USDA this week and the US is importing feed wheat from Canada. And for the second week in a row, export sales were below the low end of expectations. 

The bullish news this week was largely ignored, which in itself is not a good sign. The rains that were forecast for the western central plains did not materialize, and we sold a large chunk of hard milling wheat to Iraq (300,000 MT). 

But, that bit of positive news just wasn’t enough to offset the other negative news and the increasing nervousness of the equity and commodity markets in general. The inability of wheat to respond to positive news is a sign that a more pervasive negative attitude has emerged across the wheat complex.

The Middle East unrest and soaring gas prices were creating a lot of long liquidation over the last few weeks. The earthquake in Japan early Friday morning just added more reason for traders to head for the sidelines. For traders who have been long many of these markets that haven’t been performing lately, the added uncertainty is just too much. 

USDA released their monthly supply/demand report on Thursday, goosing the bearish sentiment. They lowered US export sales projection by 25 million bushels, mostly from spring and white wheat. Ending stocks were raised by the same 25 million to 843 million bushels, which is a 34% stocks/use ratio. They also increased world wheat production by 2 MMT, mostly with small increases from Argentina and Australia. Russia had their import projections lowered slightly. The net result was an increase in world ending stocks of 4 MMT, a healthy jump for this late in the marketing year.

Export sales were also disappointing at 657,000 MT, below the range of expectations for the second week running. Despite the huge sales in the early stages of the Middle East unrest, the pace has slowed considerably because of the high prices and the presence of the Southern Hemisphere’s crop. Adding insult to injury, this week it was announced that the US was importing as much as 200,000 MT of feed wheat from Canada. We knew we’d see much more competition in the feed wheat export market as Australia came online, but who knew we’d see the competition within our own borders.

Canada has lots of feed wheat for sale, and they’re obviously willing to get aggressive with prices. The good news is that clearly feed users are making the switch to wheat. Once that happens wheat gets a new demand base, and we’ll take that. The wheat/corn spread has narrowed over $1.60 in just the last month, moving from $2.20 to $.55. Little wonder why wheat is quickly working its way into the feed channel.

Technically, the sharp sell-off this week has taken wheat prices to longer term support levels. For Kansas City and Minneapolis front month futures, which will be the May contract after Monday, solid support is at the old double-top breakouts on the weekly charts. For KC May, we tested that level of $8.21 on Friday. In Minneapolis May, the support is at $8.28 and this week’s low was $8.53. Chicago’s weekly chart has a different look to it, but support there is still about another 30 cents lower. 

As we can see, KC is already at that support and holding so far. With the downward momentum we’ve seen this week, the other two markets could quickly test their supports early next week. If they do, they’ll likely pull KC lower in the process. 

I think the bottom line is that with wheat at, or very near, long term supports we should see the selling wane fairly soon. The seasonal pattern typically sees wheat carving out a bottom in mid/late March and then building in a weather premium as we move through April. The price action over the past week certainly has the look of a market that is flushing out a lot of length, which could set the stage for a nice rally into April. With the likelihood that long term highs are in place, a rally into late April/early May would be a very good selling opportunity.

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. Past performance is not indicative of future results.

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