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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 

sales.  

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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.

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