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Wheat rally running out of steam

Last week, wheat markets continued to push higher despite a couple of days that looked like the rally might be stalling. It’s been a very impressive run with prices moving easily through notable resistance levels. Last Monday’s supply/demand report was a nonevent for wheat markets –- and was quickly forgotten. Hedge funds have moved from a major short position just a month ago to now a net long position, something the market hasn’t seen for a very long time.

The Ukraine political issues remain a major concern for the market, but so far reports show that both Ukrainian and Russian loadings and exports are normal, although there is concern than Ukrainian farmers have slowed sales. Another concern is that plantings will decline because of reduced inputs available to producers. Some Ukrainian crop analysts are suggesting that 2014 grain production could drop as much as 11 MT due to tight funds that will limit plantings.

Also of ongoing concern is the health of the U.S. hard red and soft red crops after a long and harsh winter. Reports of winter-kill in areas of Kansas that were thought to be safe have raised the prospect of greater losses than earlier projections. Grain millers are suggesting that soft red winter wheat production will be down by 23% due to lower plantings and winter losses. Still, assessing winter-kill losses is a process and one that will be ongoing for the next few weeks.

Also supporting the price action is the persistent dryness in the western Plains. Some rains have fallen, but they are scattered and light, and not enough to recharge soil profiles at this point. According to the Drought Monitor, the far western Plains are still entrenched in intense drought. The coming rains will be more than welcome even if they are light.

In world news, India is offering another 500 TMT of wheat for sale and should find plenty of demand for their offering. 

China’s grain stockpiles continue to build with corn reserves now at a record high as feed demand declines. The Agricultural Development Bank in China is encouraging the central government to increase sales of grain reserves to tamp down domestic prices, which would slow down imports of cheaper grain and reduce smuggling. 

Black Sea grain exports are much improved from last year, which is not a huge surprise given their big crops. Ukraine is reporting that total grain exports so far this marketing year stand at 26 MMT, up 38% from last year. Russia also is reporting that total grain exports so far are at 19.4 MMT, up 39% over last year. Wheat is by far the largest component of Russia’s exports at 14.3 MMT, with corn at 2.8 MMT and barley at 2.0 MMT.

Technically, wheat has a strong seasonal tendency to move lower into late March/early April. Chart formations suggest that this rally is likely running out of momentum. So the timing appears to be good for a correction and if it happens, most likely it will be a notable one as strong supports are a good 50 cents below Friday’s close. 

If the market does get down to those levels in the next few weeks, however, I think it will present a buying opportunity. The growing season has barely begun and if the market can have this much bullish power this early, then the upside is far greater if indeed we do have significant losses across the Plains and Midwest, or if wheat production problems develop elsewhere in the Northern Hemisphere.

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