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Seasonal lows for wheat?

03/21/2011 @ 8:32am

Wheat markets continued their slide early in the week with another 60-plus cent drop in a washout type of trade before getting a burst of buying once the selling dried up. Volatility describes the price action this week as emotions and uncertainty ran high following the quake in Japan and the nuclear troubles that followed.

The troubles in the Middle East escalated as well and it appears that the US is about to be drawn into yet another conflict. All of the chaos and uncertainty in the world is taking a toll on investors and their risk appetite, with many opting to head for the sidelines until things calm down.

Fund liquidation was huge and widespread across the equities and commodities as a result, and the grain complex got swept up in the carnage. The corn market was the first to find a lifeline, first with rumors of China buying and then on a huge chunk of export business to a variety of buyers that quickly pulled corn off of the lows. Wheat wasn’t far behind and found its own surge of buying late in the week as well.

Wheat is being pulled aggressively into feed channels and when corn found support, wheat was quick to follow. Talk of hard red winter wheat possibly working its way into feed rations in the Texas region was enough to give Kansas City the stronger rally. And, of course, we’ve already seen large volumes of wheat moving into the southeast US.

The sharply lower prices of the last few weeks have stoked export demand for wheat and corn. Last week’s export sales for wheat tallied 858 TMT, well above the range of estimates. Corn sales were 1.3 MMT, double the high end of estimates. Clearly, even before this week’s washout to the downside, buyers were showing that they thought prices were attractive. It would stand to reason that export sales should see another very good week in next week’s report after seeing even much lower prices early in the week.

The sell-off broke below several major support areas in the nearby Chicago contract but held those supports in the deferred contracts and on the weekly chart. Both Minneapolis and Kansas City tested the 50% retracement of the entire rally since last summer, and did slightly breach the major weekly support of the old double-top breakout.

Seasonally, the market tends to put in a low in mid-March/early April. The quickness of the rally late this week suggests that at least short-term lows are in, and quite likely the seasonal lows are in as well. Friday’s close was disappointing after a strong session, and with the highly volatile price action it’s certainly possible that we could re-test this week’s lows; but given the surge in demand at those price levels for wheat and corn, those lows should hold at least until we get a better look at the wheat crop in the Northern Hemisphere.

Dryness continues in the western plains as the wheat crop is trying to green up. They need rain soon and the forecasts aren’t offering much. While the market has been aware of the dry conditions since last fall, you can only rally the market so much during dormancy. If that region stays dry, it will be supportive to prices at least short term. I don’t think it would be enough to get us back to the highs of early Feb, but certainly could get us back to the highs of early March, which topped off a couple of weeks of congestion trade before this latest leg down.

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