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Wheat quickly deflates

It didn't take long for wheat to erase over half of the three week rally, in only a few days, before finally finding some support late in the week, just above the breakout of the recent small trading range.

This is an important price zone for wheat, but having retraced to the first major support so quickly, the momentum could carry further down back into the trading range. That said, if the intermediate term trend has indeed turned higher, then the October lows should hold. Wherever this pullback ends up will tell us a lot about how high the next leg will go.

While the technicals are trying to turn a significant corner from bearish to bullish, the fundamentals are beginning to suggest the same thing, which would add more power to at least the next few months being sideways to higher markets.

Fewer acres will suggest lower production and likely lower ending stocks here in the US. From that perspective, even despite the large ending stocks of this year, the newly developing fundamentals suggest that the persistent selling pressure on the wheat complex should subside until we get a better handle on at least the acres, not to mention the condition of the crop as it heads to dormancy.

At this point, the most critical shift in fundamentals is the very slow pace of winter wheat planting- not only in the Midwest soft red regions, but also in some of the eastern hard red regions. Being it is so late in the season, what isn't planted by now likely won't get planted. Already, the trade is adding up about 1 million acres of soft red not planted, and hard red could well be more than that.

Other fundamental shifts that are showing on the radar are the shaky conditions of the Ukraine and Russian crops as they head to dormancy. Planting into dry conditions, the crops had spotty emergence even with late scattered rains. As those crops move to dormancy, Ukraine reports that 22% are in poor condition, 36% good, and 37% fair. Russia is also part of that dry pocket and we know that their crops are also a bit stressed as well. The Black Sea region will certainly be one that the world watches closely for extreme winter weather and potential crop damage.

China reported that over the weekend, they cloud seeded a significant area of Shandong province, a key winter wheat growing area that had been experiencing drought recently. They did manage to produce notable rainfall, but it does speak to their concern about the condition of their crop as it heads to dormancy as well.

India is expected to see an increase in wheat plantings of about .5 million hectares and will seed into very good conditions, with early production estimates of around 82 MMT, which would be their best ever and the third record crop in a row.

Brazil is still struggling through a very wet harvest season, fighting sprout and major disease issues. It looks like much of their wheat will grade as feed and early reports are that they will have to import 3 MMT from outside their own trade bloc. They will come looking for high quality wheat, which normally would be the US and Canada. However, Russia has recently opened that door for exports and could be a player as well.

Canada reported last week that 78% of their wheat will grade in the top two levels, much higher than the 65% average. This could take some of the upward momentum out of the higher protein premiums we've been seeing here in the US, especially as we head into the key spring months when those premiums are usually their highest. Canada targets the same markets as we do, and could certainly fill the quality demand, not only abroad but also here in the US fairly easily if our stocks get as tight as I expect they will.

I look for wheat to either hold last week's lows or make one more jab down into the trading range. Either way, the down move should be done by this week and I expect that wheat prices will have another leg up into mid/late November, similar in price range to the first leg we saw in October.

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.

It didn't take long for wheat to erase over half of the three week rally, in only a few days, before finally finding some support late in the week, just above the breakout of the recent small trading range.

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