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Wheat marches higher

Wheat markets saw plenty of action this week with prices getting a big boost on Monday and then it was a slow grind higher for the rest of the week. Funds were the major players and were mostly buyers in a market that offered little positive fundamental news.

But the funds, in particular the index funds have come into the wheat complex with vast sums of money and they want to be buyers. Even Minneapolis is seeing a significant increase in volume as the funds look to spread the allocations among the wheat markets to avoid position limits. While the index funds are clearly in a buying mode, other major hedge funds actually slightly decreased their long positions in wheat according the weekly CFTC report.

We'll see how much more buying power the index funds will bring to the wheat complex, but it did appear that the upward momentum was waning late in the week. Wheat prices stalled at the 62% retracement of the recent pullback for three days in a row, and that may be enough to turn it lower for the short term.

From a fundamental perspective the market had plenty of negative news to absorb, but which obviously wasn't enough to push it lower. USDA issued their monthly supply/demand report on Tuesday, lowering US wheat exports by 25 million bushels and increasing ending stocks by 21 million bushels to 885 million bushels, the largest in 10 years. They also raised world production by almost 4 MMT and increased world ending stocks by another 1.5 MMT to 188 MMT, the largest in 8 years.

On Thursday, the wheat market got more bad news when Egypt announced they'd bought 295 TMT of wheat, all from Russia. It appeared that only one firm offered US wheat, which was priced at a whopping 49 cents/bu higher than the lowest offer from Russia. Little wonder why we didn't get the business.

But it also makes one wonder how wheat prices can continue to march higher amidst this steady stream of negative news. It's boiling down to the funds and their apparently limitless capital and their regenerated interest in the grain complex. The general perception that the US dollar will remain on its face and inflation is inevitable has pushed the metals higher, supported crude, and now the funds are diversifying more into the grains, and they feel that wheat is undervalued. Tell that to our customers.

But it is what it is, and it is foolish to stand in front of a freight train. There is no doubt that the funds are coming to the grain complex; they made that public when they announced their portfolio reallocations. Some are waiting until after Jan 1, and others are getting in front of the wave, but either way they like wheat and they intend to own it.

Taking a further step back and looking at long term charts, we can also make a strong case that after a $9 break from the all-time high of just a year and half ago, the market is due to come up for air. A correction from that magnitude of a sell-off could be quite significant and last for several months. And once that correction is started, it will gain momentum on its own, particularly with the fundamental picture already so well known and little fresh news will be forthcoming for several months.

Therein lays my case of why I see wheat moving higher over the winter months, despite the negative fundamentals. The market is very aware of the fundamentals, and Southern Hemisphere crops are well on their way to harvest. We see that Australia has been shaving production estimates as harvest gets rolling, with yields a little disappointing due to frost and dry conditions in the east but overall, their crop will be at least an average one.

So the fundamentals are well established until the Northern Hemisphere's growing season really gets under way, which will be in the March time window. And that leaves plenty of time to make a significant correction of this long bear market; and obviously spring time conditions will have their influence as well. We will get more rallies in wheat that leave fundamentalists scratching their heads, but don't be in a hurry to sell it until we get into the spring season.

I still view the sell-offs as opportunities to re-own wheat for those who want to do so. Buying March calls and writing puts below the contract lows has worked well. If we get another pullback in the next week or so, that strategy could offer great opportunities as the calls get cheaper and the puts offer higher premiums to sell.

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.

Wheat markets saw plenty of action this week with prices getting a big boost on Monday and then it was a slow grind higher for the rest of the week. Funds were the major players and were mostly buyers in a market that offered little positive fundamental news.

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