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Louise Gartner: Wheat soars on hot weather

07/11/2010 @ 11:00pm

Wheat exploded higher this week as more news trickled in about intense heat in Europe likely shaving yields, drought in Ukraine and Russia hurting spring crop production, and continued woes across Canada  sharply reducing spring crop production there as well.

Hedge funds that had been aggressively short wheat at the end of June were scrambling to cover those positions and it’s estimated that they’re now net long the wheat complex as open interest was actually increasing on the two biggest days of the rally.

USDA’s supply/demand report on Friday stalled the rally and gave the market a much needed breather, but make no mistake the attitude towards wheat has changed decidedly and the bulls are back. Of course, a 95-cent rally does call for some retracement and that is likely to happen in the near term.

USDA lowered world wheat production by 7.5 MMT to 661 MMT, with world ending stocks down 7.0 MMT to 187 MMT. Big reductions in Canadian production of 4 MMT, Russia of 4.5 MMT and Kazakhstan of 3.0 MMT were the biggest contributors to the drop. Europe only had a 1 MMT reduction, and it’s likely that there will be more to come as the heat wave ebbs and flows over the key wheat regions.

USDA projected total US wheat production exactly equal to last year at 2.216 billion bushels. Beginning stocks were up 43 million bushels from adjustments in last year’s exports and feed usage. However, exports for this year were raised a very healthy 100 million to 1.0 billion, which helped offset the higher production and beginning stocks. Nevertheless, ‘10/11 ending stocks were still raised from last month to 1.093 billion bushels, a 23-year high.

That was all the market needed to see to prompt some profit taking after such a huge rally. Still, while US stocks are up, world stocks are significantly lower and will likely continue to drop in further reports. Russian and European wheat prices have risen in the last week, lifting world prices and bringing the US closer to competing in those key regions. There was also talk that the higher world prices could even make India competitive in their region; with record government stocks that have overflowed their storage capacity, they would welcome the opportunity to move wheat into the world market.

Despite the negative report, it was interesting to note that wheat didn’t exactly fall apart on Friday. While it obviously was lower, the bears weren’t trying to break the market like we’ve seen just in the recent past. Key supports are still anywhere from 20-30 cents below us, so we could see more pullback, but I think it’s safe to say we’ve established a very solid bottom and that at least the short term trend is up.

It looks to me that wheat will trade in a wide trading range for the next several months, at least until we get a look at the Southern Hemisphere’s crop. Reports out of Western Australia are showing that dry conditions in key wheat growing areas are reducing tillering and good root development before the crop heads into its semi-dormant state.   

For producers in the US northern plains who have old crop wheat to sell before this year’s harvest, this rally has been a huge gift. It’s not often we get mid-summer rallies so it’s a great opportunity to move old crop. That said, I think it’s worth re-owning wheat with calls or some kind of option spread to take advantage of what looks to be more upside potential as we head into the fall, which is normally a strong seasonal time window for a rally anyway.

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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