The wheat market continues to pound out new lows as the same problems that I have been talking about for months continue to grip this market.  As expected, the Small Grains Summary and Grain Stocks reports, released on Wednesday morning, confirmed the bearish sentiment of these markets.  Curiously, these markets put in new lows prior to rallying late in the session.  The rally may have occurred because of oversold conditions, or it may have occurred because of a new plan to implement variable storage rates on the September 10 Chicago wheat contract.  The market had been concerned about this plan being implemented on the December 9 contract, which is bearish the market.  This isn’t over yet.  I expect volatility related to this factor to continue.  Regardless of the reason, the rally failed once again.

The primary bearish factor affecting these markets is the supply of wheat.  Global supplies are high and export demand remains questionable.  The Russians continue to cover the bulk of the Egyptian business.  Egypt recently bought 150,000 mt of Russian soft wheat.  I expected to see the Russians involved, but the fact that the US didn’t supply any wheat on this tender is a concern.  Iraq has tendered for 100,000 mt optional origin.  Morocco has tendered for 600,000 mt split between 320,000 soft wheat and 280,000 mt durum.  I am interested to see how this tender goes.

Domestic supplies are also bearish.  The USDA raised all wheat production to 2.22 billion bushels from 2.184 billion bushels on the previous production report.  The increase came despite a small decrease in winter wheat.  Spring wheat production increased to 587.3 million bushels from the prior estimate of 548.3 million bushels.   Durum wheat production increased to 110.1 million bushels from the prior estimate of 98 million bushels.  I would not be surprised to see further increases in the size of the spring wheat crop.

For the people holding wheat longs or long production I wish I could paint a brighter picture for you.  Unfortunately, the only item that is even slightly bullish is the large net short fund position held in Chicago.  Sooner or later that position will be bought back.  I am betting on later.  However, the prospect of the funds having to cover a large net short position does reduce the number of aggressive sellers.  It appears trend following funds remain short more than 60,000 contracts.  It’s probably closer to 65,000 and may be 70,000.  Regardless, it is very large position.  However, I do not believe the position is going to be exited anytime soon.  At one time a weakening dollar would have generated buying in these markets, but that doesn’t seem to be the case anymore.  I contend that a rally in the wheat market is going to be countered by a weakening basis.  The possible exception may be high protein spring wheat, which seems to be in limited supply.            

If you would like more information about this article, please contact Brian at 1.877.7965 or email him at brian.henry@archerfinancials.com.

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