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Louise Gartner: Wheat struggles to hold support

It was another disappointing week for the grain complex as it was mostly more fund selling to start the week, with any meager attempt to rally only met by more selling and fund liquidation. Wheat could be called the winner, if there was one, as it managed to hold major supports (for the most part) while corn and soybeans just saw more pressure to end the week.

China remained the center of attention with more declarations of measures to control inflation, impose food price controls, limit excessive speculation in commodity markets and clamp down on hoarders with jail time. They’ve increased the bank reserve requirements twice in as many weeks, contracting the supply of cash and leading many to believe that imports on a variety of goods will certainly drop as a result. They’ve also announced that they will release more grain from government stocks, but one does have to wonder how they’ll keep food prices down if they decrease grain imports. Will the supposed drop in hoarding and their own stocks be enough?

The market took China’s announcements very bearishly. The prospect of less demand for commodities and thus a reduced inflationary threat produced aggressive selling across the entire commodity space. Nothing was sacred as funds bolted for the door in virtually everything except the cattle complex, intent on protecting their huge profits from the last few months. Some suggested that they would not be back until after the first of the year, which makes sense since they usually take their positions and activity down during the holidays anyway.

China also made headlines early in the week as negotiators in Argentina apparently inked a deal to import 5 MMT of corn along with some soybeans. They also apparently forged an agreement with Brazil to increase soybean acreage exclusively for production to export to China. 

Wheat still has some bullish friends as the weather watchers continue to point to very dry soils across the western plains and poor crop conditions as it heads into dormancy. While the rest of winter wheat country has received ample moisture and crops have improved, the concerns are still there for that key western region. 

Also supporting wheat were the announcements by both Ukraine and Russia this week that they would be extending their export restrictions until at least late in 2011, which really wasn’t all that much of a surprise. Nevertheless, it reminded the trade that the export market will be wide open next year as the most aggressive sellers will likely be on the sidelines for another year. 

More support for wheat showed up with a very large export sales number of 987,000 MT, much larger than trade expectations and clearly showing demand is strong and the US is competitive. Egypt also showed up with a couple of tenders late in the week and bought all US wheat - a couple of cargos of soft white, and a cargo of hard red winter; more confirmation that the US is indeed competitive in a wide range of wheat classes.

Harvest is moving along in the Southern Hemisphere, with more rain delays and continued quality declines in the northeast of Australia. Great yields are being offset by huge price discounts for low quality wheat, with discounts as much as A$125/ton (US$3.40/bu). It does look, however, like much of that feed wheat will find a market in Southeast Asia, which has stepped up purchases of Australian wheat for feed manufacturing.

Argentina’s harvest is moving along as well, finding good yields and ratcheting up their production estimates in the key producer of Buenos Aries as weather has been ideal to finish the crop. Normally, Buenos Aries will raise nearly 50% of the Argentine crop, and that province is expecting above average yields this year. The Argentine government has raised production estimates to around 13.0 MMT, while USDA already has them at 13.5 MMT.

The technical picture shows some very interesting formations. It was a huge disappointment that wheat couldn’t sustain the price strength above the trading range highs that it reached just a week ago. The sharp sell-off certainly shows the lack of follow-through commitment from the bulls. In just a matter of five trading sessions, prices had come all the way down to the trading range low, a major support level. That wheat has managed to hold the key trading range low support for Kansas City and Minneapolis is encouraging, but that low was violated in Chicago. While prices are trying to recover, the weakness in corn and beans is making that a difficult task. 

The huge reversals down from last week, and their confirmations this week, also suggest that a major high is in for all of the grains. Not only was there very little attempt to regain that upward momentum in all of the grain complex, but corn closed below the major gap support on the weekly and daily charts; a pretty bearish technical scenario for corn, despite the bullish fundamentals. I still contend that if corn has topped, so has wheat.

One could make the argument that fundamentals would support wheat staying in its trading range, but all kinds of things could happen to derail that notion. If the dollar has indeed seen a major low, if China keeps clamping down, if inflation fears subside, if funds continue to liquidate, and/or if corn and beans keep falling, wheat will not be able to stand alone.

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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