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Louise Gartner: Bullish fundamentals

Wheat markets did a whole lot of nothing this week; even with some strong days in the rest of the grain complex wheat prices had little more than a meager rally that couldn’t even get back into the major trading range for Chicago futures. This presents an increasingly bearish technical picture.

But, there are still plenty of bullish fundamentals to consider, not the least of which is the supposedly tight grain situation in China. Whether it’s from low production that hasn’t been reported properly or just lots of rhetoric, Chinese farmers are apparently hoarding lots of grain and forcing government stocks to very low levels. The Chinese crackdown on hoarding and speculating, their increased sales of grain from government stocks, their recent establishment of price controls and increasing bank reserve requirements are creating quite a bit of uncertainty across most market spaces, which has contributed to some of the pressure in grains.

We still have dry weather in the US western central plains and less than stellar winter wheat conditions as it heads into dormancy. Crops have seen improvement in the Midwest and were always looking good across the northern plains and in the PNW.  Now there is talk of dry weather in the Chinese winter wheat areas. It will be tough to rally wheat on that news, however, since Chinese wheat is also near dormancy  and most of their winter wheat is irrigated.

Russia’s government grain stocks were estimated to be 9.6 MMT, with half of those expected to be auctioned off by July. Southern Russia’s producers have continued to plant despite the late date, as the weather has brought some moisture and unusually warm days that they feel is worth the risk of late planting. SovEcon estimates that the 2011 Russian grain crop will be around the 80 MMT level, which is what most feel is needed to supply domestic needs. Some are predicting that a shortage of inputs such as fertilizer and equipment will lead to reduced spring plantings and lower yields. In 2010, Russia produced 60 MMT after their worst drought in 100 years. In 2009, they produced 97 MMT which helped the Black Sea region remain the world’s largest wheat exporter.

Even with all of these bullish fundamentals to pick from, the charts are painting a much different picture. After spending several weeks trading in a wide range, wheat briefly spiked into new highs three weeks ago only to fail at those highs and quickly fall all the way to the bottom of the range for KC and Minn, but break below the range for Chicago. Chicago has now had seven trading sessions in a row just below that trading range low with apparently no power to push back into the range. 

This price action is important for two reasons if not more; number one, the failure to hold new highs and the sweeping reversals lower afterwards on both daily and weekly charts are looking more and more like major highs have been established. And two, the inability of Chicago wheat to even get back into the range when it’s so close, when KC and Minn are still in their ranges, and when corn and beans have had some rebound action of their own suggests that the market has yet more weakness ahead.

For new crop futures, there really never was much of a trading range, but after setting new contract highs, the reversals are there as well. And generally speaking, the front months are usually the leaders; so when the front months are failing to set new highs while the back months are, you have bear spreads working – and that’s bearish. 

Lastly, if the US dollar has indeed bottomed, it will likely change the scope of the entire commodity space from bullish to bearish. The dollar has rallied to a key breakout resistance but has yet to move beyond it. However, the euro has broken below its key breakout support, which suggests that the euro has topped which would also suggest that the dollar has bottomed. 

From my perspective, it appears that grains have put in major tops at least for the intermediate term, and arguable longer term. It also looks like wheat has little rally power in it, and therefore could well be resuming its sell-off in the near term. 

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. Past performance is not indicative of future results.

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