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er: Wheat Stalls at Old Highs

Well, the wheat markets started the year with a rally to old contract highs in Kansas City and testing the swing high in Chicago, but failed to maintain the momentum and quickly slumped as it wrapped up the first week of trading of 2006. Poor export sales last week only added to the weakness.

Funds were aggressive buyers last week and again early this week, confirming the hype of loads of new money flowing into commodities. But all markets have to have a fundamental base, and the fundamentals finally spoke up late in the week. The recent rally has all but taken the US out of the export arena for anything other than high quality wheat. Egypt snubbed us with a purchase from Australia and Russia, bids that were well below ours.

In addition, farmer selling was huge on this jump in prices and the cash basis weakened, suggesting the commercials aren’t as exuberant about these price levels as the funds. Seasonally, an increase in farmer selling after the first of the year is typical, and one would expect to see that, especially if prices are jumping.

However, while the short term fundamentals had their say this past week, the longer term fundamentals haven’t changed and the wheat complex has plenty of reasons to find support on the breaks. We know that Argentina won’t be a competitor this year, nor will Russia or Ukraine for the next two years, both of which are very significant developments.

In addition, when we look at the extremely dry and already warm conditions in the US southern plains, the drought status of much of TX, OK and AR, and the developing La Nina, the ‘bigger picture’ fundamentals continue to look quite bullish. Certainly, the market is reacting to tight old crop supplies of quality milling wheat, but the prospect of new crop problems this early in the year is slowly building a very solid support base for both hard red winter and hard red spring.

The fundamentals for soft red winter wheat aren’t nearly as bullish as for the hard wheats, thereby increasing the likelihood of KC continuing to gain on Chicago. Soil moisture conditions in the major soft red winter wheat producing areas of the eastern Midwest are very good. With plentiful old crop stocks, the increase in planted acres and good growing conditions, soft red supplies are expected to remain burdensome.

Technically, look for support in Chicago March from 3.23-3.27 where we have two breakout points and a trough. The next support will be another trough at 3.10 and then the contract low of 3.07. Look for resistance at the breakout of 3.345, then the trough of 3.415 and then the swing high of 3.47.

In Kansas City March, look for support from 3.73-3.76, a breakout, trough and 50% range. The next support would be 3.69, a .618 retracement and the 40-day moving average. Resistance will likely show up at the breakout of 3.82, then the trough of 3.865, and then the double top at the contract highs of 3.94.

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.

Well, the wheat markets started the year with a rally to old contract highs in Kansas City and testing the swing high in Chicago, but failed to maintain the momentum and quickly slumped as it wrapped up the first week of trading of 2006. Poor export sales last week only added to the weakness.

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