You are here
Ray Grabanski: Wheat market top?
Wheat market has dropped enough from recent highs to have formed a potential
top in the wheat market, a factor that may have major implications for the corn
and soybean markets. Wheat prices that have dropped $1.50 from the highs last
Thursday night indicate a potential 'blow off top' has been formed in wheat, as
prices have dropped more than 7% from recent highs. That means a potential top
has probably been formed in wheat for now, with prices rolling much higher than
anyone expected, given we still have nearly 1.1 billion bushel carryout projected
for the US this coming marketing year. However, it's likely the USDA will cut
that projection significantly in the August report tomorrow morning (perhaps to
800-850 mb?), due to larger exports. But US wheat yields might also see a
hike, as US HRS wheat yields are better than expected, and winter wheat yields
were also large (likely record large).
Still, US and world supplies of grains are still adequate in spite of a large
cut expected in world wheat and feedgrain supplies. US corn and soybean yields
are likely to be hiked as well in the upcoming report, with Pro AG yield models
showing corn yields at 165.3 bu/acre and soybeans at 43.81 bu/acre (both above
USDA's 163.5 corn and 42.9 soybean yields from July). It's likely the USDA will
show that US crops are going to be above average, and we'll help meet the
shortfall from the growing season troubles across the world.
We may see a bounce in grain prices once the report is over, as wheat prices
(even though they've likely topped) typically regain some of recent losses
following a V top (33-50%), so it's likely that sellers will have another chance
to sell the market at these heightened levels again. That rally should come in
the next week, so it will need to occur after the USDA report. Pro Ag expects a
50-75c rally from the lows, and already today we are getting about 25c of that
rally. It will be interesting to see how the market reacts to tomorrow's
report. It is unlikely USDA will cut ending stocks of wheat much more than 200
mb in this one report, as that just isn't their style to do such drastic changes
month-to-month. Instead, it's likely they'll spread out those hikes in demand
and cuts in ending stocks over a few months reports. Pro Ag looks for a hike in
wheat production, a cut in wheat feeding, and a drastically higher export
projections that, in the end, will result in smaller ending stocks of wheat.
We simply must recognize the FSU and EU production problems, and that will
reflect in larger exports. World ending stocks of wheat are also likely to be
cut. One thing being talked about in the trade is Russia potentially needing to
import grain to meet feed demand. Pro Ag highly doubts Russia would import any
grain for feed. Instead, use of feedstuffs from salvaged portions of damaged
crop is more likely. Russia is just not in the mood to pay transportation costs
to import grain into their country, and Pro Ag highly doubts this will be done
in a Russian market economy.
Pro Ag will become a seller of grain again on the recovery in wheat futures of
50-75c, selling wheat most aggressively but also making some sales of corn and
soybeans. We'd expect this to be the last opportunity prior to harvest to get
wheat, corn, and soybeans sold at decent price levels.
Some analysts are afraid to price 2011, 2012, or 2013 grain on big rallies like
this as they are afraid their crop insurance protection is not yet in place.
But Pro Ag would disagree. If you plan to farm the land and plant the crops (ie
land leases/ownership is in place and you intend to purchase revenue insurance),
we feel you are free to sell up to your insurance guarantee with protection in
place from the crop insurance that will be bought in the future. If prices go
up, these prices will be locked in at higher insurance levels. If prices go
down, the hedge will have worked as profits will accrue (and the insurance price
protection will not have provided the risk management without the hedge).
Clearly, wheat is the market most attractive to sell at $7+ wheat futures, $4+
corn futures, and $10 soybean futures in a multiple year hedge (these are prices
offered out for the next 3 years). This takes some thought and preparation by
producers, so we'd encourage you to look at it thoroughly before making any
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgment and do not
guarantee that profits will be achieved or that losses will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and
options on futures.