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Wheat market eyes Europe

Continued European debt fears, interexchange wheat spreading, and weak export demand pressured the wheat market today. The market is still concerned about the potential of European bank failures and what affects a bank failure might have on the European economy as it struggles to keep from slipping into a recession. The USDA export report released this morning came in a disappointing 168,000 tonnes. The trade was looking for sales to come in between 300,000 and 500,000 tonnes. The US was also shut out on Egyptian wheat tender which was announced today. As for the discrepancy between the exchanges it had to do with prepositioning before expanded position limits take effect on January 17th. The Minneapolis exchanges March contract was down 17 1/2 cents, Kansas City was down 6 cents and the Chicago wheat was down 4 1/2 cents. The CBOT exchange is awaiting approval from the CFTC to let funds expand their position limits. If approved, it will increase single month position limit for wheat from 5,000 contracts to 12,000 contracts. It will increase all wheat position limits from 6,500 contracts to 12,000 contacts. This change in position size will allow funds to carry a larger Chicago wheat position. Right now funds that want to own more wheat contracts than they are allotted by the CBOT buy the Minneapolis and KC contracts to fulfill their ownership needs. With the expanded CBOT limits they will not have to own as many Minneapolis and KC positions. The trade looked like it was liquidating out of some of their Minneapolis contracts and buying the Chicago contracts before the funds look to make their anticipated jump from the Minneapolis exchange into the Chicago exchange. The trade is anticipating for these new position limits to take effect on January 17th.  Allendale looks for next week’s trade to be dominated by position squaring before Thursdays USDA report.

Declining Stocks: Judging by Allendale and other analysts expectations, you would assume falling wheat stocks means higher prices. It makes a good argument until you consider wheat prices are already overvalued at these stock levels. Wheat is getting current pricing from its value as a feed alternative to corn. Don’t get exciting about declining wheat stocks unless corn continues its rally…Rich Nelson


Trade Recommendation:

(1/04) Stand aside.

Judging by this week’s stats, you have to recognize this market has some problems to work through. February futures lost $1.12, cash cattle dropped $1 at $120-$121 in KS/TX, and wholesale beef took a $4.39 hit in choice and $0.16 for select. This week’s good economic news would normally have given bulls something to dig into. As Allendale’s proprietary beef demand model shows, the red line on this chart, the economy places a major, though sloppy, role in determining beef prices. We will release the remainder of this chart, our 2012 economic and beef demand projections, just two weeks from now at our AgLeaders Conference. The issue right now is supply. Our friends in Dodge City, Kansas report temperatures hit 53 degrees today. That is 10 degrees over normal! For the short term, the trade will be making guesses on weight gains (+0.5% to +1.5% better weights) and trying to price it in. It will not stop the overall rally we expect in the coming weeks but will be an issue for the short term…Rich Nelson


Working Trades:

(09/07) Sold 2 April 118 puts 2.57 each, risk to 2.20, objective 0. Closed 1.12.

(11/23) Sold 1 February 118 put 1.60, risk to 1.70, objective 0. Closed 0.85.

(11/23) Sold 1 April 122 put 2.67, risk to 2.80, objective 0. Closed 2.27.

(01/06) Bought February 120.50, risk 118.90, objective 125.00. Closed 120.32.



Rich Nelson 

Director of Research 

Allendale Inc. 

4506 Prime Parkway 

McHenry, IL 60050 


Hypothetical performance results have many inherent limitations, some of which are described below.  No representation is being made that any account will achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.  One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.  In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading.  For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results.  There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

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