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Wheat prices turn choppy

Wheat prices started the holiday-shortened week with a continuation of the surge into new 4-year highs, led of course by Kansas City. The cold snap over the weekend was certainly enough to do some damage in the TX and OK panhandles, but it could be weeks before we're able to assess the damage. The forecasted light rains failed to develop in those extremely parched areas and sellers weren't too interested in stepping in front of those fundamentals.

However, the buying dried up after Tuesday's session and the rest of the week price action had a 'tired' tone to it. Even with rains being removed from short-term forecasts, the market couldn't regain its momentum as it chopped around just below the contract highs. Prices did hold the first level of support, but Friday's attempt to surge again to test the highs failed early in the session and it took a late rally just to manage a slightly higher close.

Price action does, indeed, look like it could be stalling at these lofty levels, particularly after having reached the second round of targets. The seasonal, too, could still exert some pressure into the early days of March. The record volume we're seeing at these new highs could also signal a turning point.

Does this mean the rally is done and the weather market is over? Not hardly. Indeed, by many accounts, we're still in the early stages of a weather market, considering the crop has barely begun to grow in the southern plains and has yet to break dormancy in the central plains. If timely rains don't develop soon, we’ll have a 'real' weather market and hang on if that happens. Can prices go even further? Absolutely. But it's in Mother Nature's hands.

Here's the thing… USDA is projecting 2005/06 hard red winter wheat ending stocks at 173 million bushels, which is the tightest carryout since 1996/97, the year when prices reached all-time highs. With acreage of hard red winter steady with last year and the poor weather conditions already prevailing in key growing areas, how will the U.S. raise more bushels than last year? How will we replenish our stocks? We know that Russia and Ukraine won't have a normal crop nor will they be notable exporters for at least another year and a half. Argentina won't be an exporter until December at the earliest, assuming they fare better in their next growing season.

Who will be our competition for this high quality type of wheat? Will demand decline enough to make a difference or will buyers pay up? If the current weather pattern continues, or worse yet, creeps up into KS, CO or NE (already showing signs of dryness), prices could certainly move much higher. Or, we could have an all-too-familiar experience where it starts raining in the plains and a loser crop turns into a bumper crop.

Personally, I'm not banking on the latter scenario. I think we'll be lucky to scrape together a respectable crop, much less one equal to last year. And yes, personally, I think prices are ultimately going higher, but it won't be an easy ride or for the faint of heart. Weather markets are exciting, opportunistic, brutal – and very difficult to trade.

Having stated my case for the next couple of months, I will also say that we'll likely see more correcting in the near term. The recent price action suggests a lull taking place and likely more purging of the weak longs. The weak basis suggests that the cash market will be a drag, at least temporarily. Any legitimate forecast of rain will send the market lower, which will be our buying opportunities. The spread between KC and Chicago will also have its corrections, but those, too, will be buying opportunities. With a big crop of soft red winter all but assured with already a large carryover, Chicago will struggle to keep pace with the quality hard red winter of Kansas City.

While I've encouraged producers to be pricing old and new crop into this price rally, save some ammunition for that possibility of more upside. Consider just buying puts on the May or July futures for now to set a floor and see what the weather will present. Also though, get more aggressive with fixed futures on 2007 and 2008 crops at these price levels. If weather stays poor, the 2006 prices will move much stronger than those deferred futures contracts. If weather saves the crop over the next month, we've got the floor protected for this year, and you've got those next years' prices covered as well.

While most attention has turned to weather, we're still monitoring the Iraqi purchase, which seems to be a never ending ordeal. With the increased violence and curfews, they've been unable to hold their meetings to finalize the purchases. It's been rumored that they've increased their tender to 1.5 MMT and will likely take it from the US and Canada. However, Australia has sent a delegation to Iraq to ensure them that they can still deliver wheat through private exporters rather than the banned AWB.

India is said to have purchased .5 MMT from Australia, but most traders there feel that the purchase is too late to arrive before their harvest begins. It is also rumored that Indian farmers may try to block those imports. Either way, India went from projecting a record harvest to now looking at production roughly equal to last year, and will likely have to import more to replenish government stocks.

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 prices started the holiday-shortened week with a continuation of the surge into new 4-year highs, led of course by Kansas City. The cold snap over the weekend was certainly enough to do some damage in the TX and OK panhandles, but it could be weeks before we're able to assess the damage. The forecasted light rains failed to develop in those extremely parched areas and sellers weren't too interested in stepping in front of those fundamentals.

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