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Louise Gartner: Huge hedge fund support

After spending most of the week slipping lower, wheat managed a strong day on Friday to end the week in positive territory. While fundamentals in wheat remain very positive, it’s the corn and bean market that has taken over leadership of the grain complex despite harvest in full gear. The grain complex is also finding huge support from hedge funds who added to record long positions in corn as the weaker dollar and disappointing yields fueled bullish attitudes.

Wheat is still being supported by adverse weather, as frost in Canada ended the growing season before many crops were fully mature and on continued drought conditions in key growing areas of Russia delaying winter wheat plantings. This past summer has been one for the record books for both countries but for opposite reasons; too hot and dry in Russia and too cool and wet in Canada. Both issues have obviously had major impacts on the grain complex.

Export sales were expected to top one million tons again this week, but came in quite short of that at just 485 TMT, which included some Egyptian cancellations, as they made adjustments to previous sales.  It certainly appears that the recent run-up in prices is starting to take its toll. After the initial flurry of buying to replace cancelled Black Sea sales, it looks like buyers are more comfortable with their stocks, with some suggesting that the mills needs are met for the next two quarter. If so, then they can easily wait until the Southern Hemisphere’s wheat comes online. 

And so far, it looks like the Southern Hemisphere will have plenty to sell with Australia’s crop now projected to be the biggest in 10 years.

Great rains across Argentina all but assure them with good yields as well. There are concerns that Australia won’t be able to handle the large crop from a transportation and exporting standpoint. It’s likely that there will be bottlenecks and frustration as the still-young independent export market finds its bearings. But make no mistake, they’ll get it figured out and both Argentina and Australia will have high quality wheat available to a very high demand situation staring in about late October.

The expected large production coming out of the Southern Hemisphere makes the marking window for the Northern Hemisphere pretty clear. Expect to see a big increase in export competition very soon as both of those countries prepare for their sales programs. While corn and soybeans could provide strong support for the wheat complex, it’s very likely, that on their own, wheat prices will struggle to hold these values - at least from a futures perspective. 

We could very well see high quality cash wheat hold values as Canadian and northern plains supplies continue to lose to Mother Nature. We continue to see the higher quality futures markets of Kansas City and Minneapolis gain on Chicago. Basis levels are also diverging, with spring wheat getting a boost this week from the poor weather while winter wheat basis has remained generally steady.

It’s very difficult to be comfortable with a direction in wheat when there are so many important factors at play. While the fundamentals are becoming well known, the speculative side of the market is very much up in the air. Funds love bull markets and they’ve found them in corn and beans. Wheat does get some spillover support from the row crops but their charts are not nearly as positive as corn or beans and will likely be the first to buckle if the grain bulls run out of gas. Seasonals are also about to turn lower as the Southern Hemisphere’s harvest usually depresses the market. That said, the grain bulls certainly have not run out of gas yet, so one has to respect the strength and try not to get run over.

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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