Winnipeg, July 19 – The ability of the wheat market to move higher these past two weeks has been somewhat surprising to analysts, with it now appearing like the lows for the wheat market are probably in following two years of steadily bearish fundamental injection. However, given still ample global supplies, the wheat market was likely only in the process of transition to a broad sideways price trend for 2010-11.
While that’s the view today, the trade must be impressed with MGE Dec. wheat futures which have in quick order been able to blow through and above significant chart resistance at the US$5.70/bu area and now beyond psychological resistance at US$6.00/bu.
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Wheat futures lately have been energized by downwardly revised production estimates for Russian and European wheat harvests. The threat of reduced world production, with Russia reportedly having its worst drought in 30 years or more, rekindled bullish momentum, and sellers seem unwilling to aggressively step in front of the upward trend at this time.
Concerns over output from the European Union’s second-largest wheat producer increased after Deutscher Raiffeisenverband, the German farm co-operative, cut its German crop forecast by 11.1 per cent to 44.2 million tonnes. Meanwhile, there is increasing concern that Russia’s grain production will fall short of the government’s revised forecast of 85 million tonnes.
I’m still of the opinion though that world stockpiles of wheat remain ample and U.S. wheat stock projections are burdensome with wheat futures lacking sufficient fundamental reason to justify its surprising strength. This rally in my opinion remains primarily driven by speculative money flow and has become overbought after an impressive two-week rally.
U.S. wheat ending stocks supplies, projected in 2010-11 at a massive one billion bushels ( a 23-year high) and a stocks-to-use of almost 50 per cent, yet MGE Dec futures have rallied $1.06/bu higher since June 29, and outperforming both corn and beans.
But perhaps the bearish sentiment that has prevailed in the wheat market for so long simply has too many spec traders leaning the wrong way, and they now feel the pain in trying to cover short positions as margin calls escalate…especially now at a time when questions begin to arise about the size of crops growing in export competing nations.
Fundamentally the wheat market remains bearish, but that has been talked about for so long that traders seem uninterested. This creates a situation where the divergence between the two sides of the market continues to grow, a situation that normally ends with the market returning back to its fundamentals at some point. Rallies would appear to remain selling opportunities. But nonetheless, this has emerged into a rally that must be respected.
Mike Jubinville is an analyst with ProFarmer Canada
