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Wheat melts through supports

For another week, wheat was not spared the massive fund liquidation that swept across the commodity complex.

The liquidation occurred as the quarter-end brought a wave of selling from funds expecting another round of customer withdrawals, especially after they get a look at yet another dismal quarterly earnings report. The early week failure of the economic bail-out package certainly didn't help. There is fear that with the economic stresses spreading across the globe, demand for all commodities, even wheat, will see notable declines.

The fundamental front was little changed after a few countries updated production estimates, most of which saw an increase in production that would likely make its way into the cutthroat export arena, further adding pressure to a market already on life support. The stronger dollar and the tightening credit situation could end up stalling exports, but that was not evident so far as this week saw another strong performance of 672 TMT, again with most of the sales going to quality hard red winter and spring.

USDA released the small grains summary along with the quarterly stocks report on Tuesday. All wheat production for 08/09 was increased by 34 million bushels from the Sep crop report, now sitting at 2.5 billion bushels, compared to 2.067 last year. Most of the increase came from spring wheat, which saw a 46 mb increase from USDA's last estimate to 547 mb, up from 479 last year. Durum dropped 22 mb to 85 mb, compared to 72 mb last year; and hard red winter was lowered by 20 mb to 1.035 billion bushels, compared to 962 mb last year. Soft red winter was pegged at 614 mb, up 256 mb from last year, and white winter was 219 mb, up 22 mb from last year.

The quarterly stocks as of Sep 1 reflected usage for the first quarter of wheat's marketing year, which began on June 1. Stocks were pegged at 1.857 billion bushels, below the bottom of the estimates range, but still 140 million over last year. The surprise came from a significant increase in wheat feeding for the first quarter, reflecting the aggressive pace of moving wheat into feed channels. The abundance of low quality wheat, particularly soft red winter, will likely allow the aggressive feeding pace to continue, despite the new corn crop coming into the pipeline.

STATS Canada released their grain production estimates, which had a bearish slant as well. Their total wheat production was raised to 27.3 MMT, up 1.85 from their July estimate and up 7.3 MMT from last year. It is also almost 2 MMT higher than USDA's September estimate, and is the highest wheat production year since 1996. There, too, most of the increase came from spring wheat, which saw yields increased by 1.8 bpa to 30.0 bpa. Winter wheat yields were estimated at 66.5 bpa, and durum yields were 31.3 bpa. Canola production was also estimated at a record 10.87 MMT.

Russia raised their wheat production estimates slightly, reporting a 58.5 MMT crop, up 4% from last month, but, interestingly, still 1.5 MMT less than USDA's Sep estimate.

Australia's crop appears to be hanging in there for the most part. Recent rains in key areas have been very helpful, but not as widespread as liked. Early harvest is about a month away, and one would expect that they will be aggressive about regaining market share after two years of being on the sidelines. I would expect that will only contribute to the price pressure this fall, unless of course, they run into problems with their harvest, but that's a long shot for the bulls to hope for.

Technically, wheat has melted through key support levels with hardly any recognizable rallies in the last month. Wheat had built an impressive base two weeks ago, but couldn’t even get past the first minor gap area that would have quickly taken it to a major gap and double-bottom breakout. This failure prompted an acceleration of selling once it turned south again, and the downdraft blew out major support from last fall’s trading range low. Downside targets still sit at 5.90 basis Chicago Dec. Fundamentals are very bearish, with technicals getting oversold once again, but surprisingly not in an extremely oversold position. If wheat tests the downside target and holds, it is quite possible to see a sharp snap-back rally; but again, I continue to expect rallies to be short lived, so take advantage of them when they occur.

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.

For another week, wheat was not spared the massive fund liquidation that swept across the commodity complex.

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