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Wheat finding a bottom?
After peaking in February of last year, the wheat market has been in an 11 month downturn with prices finding a low in mid-December. Since then, the market made a very significant bounce with July Chicago bottoming at $6.21 and then rallying up to $7.02-3/4. Prices then drifted back and found support last week at $6.28-1/2. The question now: Are prices poised to move lower or higher?
People who follow charts (technicians) would argue that the wheat market is showing signs of forming what is termed a 1-2-3 bottom. That is, the market bottoms, rallies back, and then sets back, but the low is not lower than the previous low. If that setback holds and then prices begin to rally, it will often attract buying interest. If prices can move above the most recent high, then look for a longer term low to have been established.
As for fundamental factors, the world is not about to run out of wheat. There is ample inventory and record carryout. With that being said, the market has already factored this in. Unless 2012 produces record crops in both corn and wheat, it’s highly likely that wheat values will level off at current prices, or begin to track higher. U.S. wheat is currently undervalued, compared to European wheat, and continued talk as of late that Black Sea exports could slow due to the potential for Russia to establish an export tax, could also provide underlying support. The real question is whether there is anything lurking out there that could rapidly rally prices. On the near term horizon, the answer is likely no. Yet, prices are cheap and, from a long term perspective, we wouldn’t be surprised to see world acreage decline in the year ahead. Any disruption of production elsewhere in the world and suddenly the market may have to factor in concerns that longer term supplies will be on the decline. That is typically what happens in bull and bear markets. Fundamentals look mostly bearish at the bottom of the market. Ultimately though, the gears are already in motion to change either demand or supply. The same can be said when the market is at a top and fundamental factors all appear to be positive. Yet, underneath the surface, when prices are high, demand begins to slow and production increases are already planned.
In 2008, wheat led the bull market as all commodities moved higher. A world shortfall of supply, along with big investment dollars and a very bullish attitude for commodities in general, helped push wheat prices to record high levels. The world responded with record high production, which is reflected in comfortable carryout levels. Therefore, a bull rally like 2008 is not likely, but the expectation that wheat could rally 15% to 25% in the months ahead is a reality and increasing possibility. Treat this as an opportunity to sell the remainder of 2011 and some of 2012 crop.
If you have questions or comments, or would like help implementing strategy for the year ahead please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.