May 4, 2009

US wheat futures soared above key technical levels Friday (May 1) but abundant world supplies and slow demand should limit the upside in the coming weeks, unless another major producer develops crop problems, analysts said.

 

The US winter wheat crop has scattered problems, including plants stressed by dryness and zapped by freeze in parts of the southern Plains. However, the problems aren't considered too serious in the big scheme, and world wheat ending stocks are expected to grow in 2009-10.

 

That makes it difficult to sustain a rally in benchmark CBOT wheat without a production scare in another part of the Northern Hemisphere, said Jerry Gidel, analyst for North America Risk Management Services. The world produced a record crop in 2008-09 due to expanded plantings and favourable weather.

 

"For practical purposes, it probably isn't going to be sustained very long," Gidel said about Friday's rally. "The problem about it is that the harvest is going to be coming around the bend here. Nobody gets excited about a problem here because everybody else has wheat to sell."

 

World wheat carryover in 2009-10 is expected to reach an eight-year high of 171 million tonnes, up from 162 million tonnes in 2008-09, according to the International Grains Council. The stocks include 53 million tonnes from the five major exporters, which is six million tonnes more from that category than a year ago.

 

US export demand has been lacklustre lately due to competition from other countries, including aggressive new competitors in the Black Sea region, analysts said. Russia and Ukraine have undercut the US in sales to major importers, such as Egypt.

 

"We have very slow demand," said Shawn McCambridge, analyst for Prudential Bache. "We have abundant supplies that we're carrying into next year. We have good production potential. If we come out with an even normal, average-type yield," the US will still have a good crop, he said.

 

Traders are keeping their eyes on conditions in Ukraine and eastern Europe amid worries that a lack of rain could hurt production. Persistent dryness there would improve US export potential, but the US export market is going to see "another quiet year" if they have decent production, McCambridge said.

 

CBOT July wheat surged more than 30 cents Friday to a four-week high of US$5.74 per bushel. The first downside target for the market is US$5.18, McCambridge said. If the contract breaches that level, it will aim for US$5.12 1/2 and then ultimately US$5, he said.

"I don't really look for the conditions that would slam dunk this market, but I think it will be a gradual erosion as we go forward," McCambridge said.

 

However, wheat is more likely to see a breakout to the upside than to the downside after trading sideways for weeks, said Greg Wagner, senior commodity analyst for AgResource Company. A large speculative short position in CBOT wheat is supportive for the market, he said.

 

Indeed, Friday's rally was fuelled by short-covering and technical buying as CBOT July wheat jumped above its 50- and 100-day moving average, traders said. Speculative funds are non-commercial in nature.

 

The weather in Ukraine and eastern Europe bears watching, Wagner said. As of Thursday (Apr 30), dryness encompassed "most of the key winter wheat growing areas" in the former Soviet Union, although rain is possible in the next few weeks, Cropcast Agricultural Weather said in a report.

 

"Over the next 30-45 days, if the wheat market is to rally, there will be a lot of viewing of what's happening in that eastern European, Russian and Ukrainian crop," said Dave Marshall, an independent marketing advisor and commodity broker.

 

Moving forward, wheat could potentially find spillover support from gains in CBOT corn and soy if the row crops rally on wet planting weather, Marshall said. However, wheat "would need a lot of short covering" if it were to recover strongly, he said.

 

Still, McCambridge is not convinced short-covering can prop up prices. The speculative funds' net short position gives wheat the potential for an exaggerated upside rally, but the market does not have "the conditions right now that would take us to a price that would take us to aggressive covering," he said.

 

The seasonal pattern for wheat calls for a rebound ahead of the USDA's May 12 supply/demand and production reports, Marshall said. The reports will include the government's first estimates of 2009-10 world wheat production.