May 22, 2006

 

US Wheat Outlook on Monday: Down 4-6 cents on gold, technicals, HRW rain

 

 

U.S. wheat futures were called to open down 4-6 cents per bushel Monday following similarly weak overnight prices amid good volume, lower crude oil and precious metal markets and light overnight rains that could stabilize the drought-hit U.S. hard red winter wheat crop, brokers said.

 

The gains follow last week's rally to a 9-year high in Kansas City Board of Trade hard red winter wheat futures and 3-1/2-year tops in Chicago and Minneapolis wheat futures, they noted.

 

The rally has been built on speculative buying amid concerns about the reduction of U.S. hard wheat supplies due to adverse U.S. growing weather, most notably a lingering drought in the Southern Plains.

 

Harvest of the U.S winter wheat crop has begun in the Southern Plains while the crop in the northern part of the belt continues to mature, leaving it particularly vulnerable to harsh temperatures and lingering drought.

 

Overnight rains totaled 0.10 to 0.70 inch in central Kansas, the top U.S. hard red winter wheat producing state, with isolated showers outside of that area, according to Joel Burgio, a meteorologist at DTN Weather. Those rains came amid hot temperatures, ranging from the 80s to 90s Fahrenheit.

 

Nebraska received very little rain while temperatures remained above-normal, topping out in the 90s, he said.

 

Forecasts called for possible lingering rains in Kansas Monday and Tuesday, while temperatures were expected to remain above normal, with top readings into the 80s and 90s, Burgio said.

 

Mostly dry, hot weather was expected Thursday and Friday, he added. The six- to 10-day outlook called for above-normal temperatures and mostly below-normal rainfall.

 

"The rains weren't huge and widespread, but when you're at the high prices - we hit contract highs last week - you can expect volatile trade," said James Barnett, a grain analyst at Man Global Research.

 

"You can expect exaggerated moves (in U.S. wheat futures) to slightly better than expected rains," he said. "I think it (the rains) may also take a little bit of the sting away from any further drop in crop ratings.

 

"When you're above US$4 in Chicago and above US$5 in Kansas City, you're at the kind of price level where you can get pretty sharp price pullbacks on news that would seemingly not justify that," he added.

 

Last week, the U.S. Department of Agriculture reported that the U.S. winter wheat crop was 36% in good to excellent shape, up 1 percentage point from the previous week's rating.

 

In the overnight e-CBOT session, most-active July wheat closed down 7 cents at US$4.09 1/4 per bushel. Volume overnight in the July contract totaled 3,030 lots.

 

"Bulls still have the solid technical advantage, but they may be getting exhausted at higher price levels," a technical source said.

 

"The next major upside price objective for the bulls is closing prices above solid longer-term resistance at the 2002 high of US$4.34 a bushel, basis nearby futures, the source said. "It would now take a close below solid support at US$4.00 to provide the bears with some fresh downside technical momentum."

 

First chart resistance for CBOT July was seen at US$4.27--the contract high--and then at US$4.34. First support was put at US$4.08 1/4--Friday's low--and then at US$4.04.

 

Kansas City Board of Trade July wheat ended overnight down 3 1/4 cents at US$5.01 per bushel. Volume in the July contract was 641 lots.

 

"Bulls still have the solid technical advantage," the technical source said. "Look for higher volatility in the near term. The next major upside price objective for the bulls is closing prices above longer-term resistance at the 1997 high of US$5.14 a bushel, basis nearby futures. That mark was hit last Thursday. A close below support at US$4.70 would provide the bears with some fresh downside technical momentum."

 

First resistance for KCBT July was seen at US$5.14--the contract high--and then at US$5.20. First support was seen at US$5.00 and then at US$4.91--the top of last week's upside price gap.

 

The CFTC reported Friday that speculators in CBOT wheat futures and options combined for the week ended May 16 sharply boosted their net long stance; they ended the week long 98,609 lots, up 19,781 contracts from the week before and short 63,969 contracts, down 2,832 lots from the previous week.

 

For KCBT wheat futures and options combined, speculators were long 58,101 lots, up 4,574 contracts, and short 5,405 contracts, up 1,217 lots from the previous week.

 

For MGE spring wheat futures and options combined, speculators also boosted their long holdings by 2,280 lots to 16,066 contracts and decreased their short holdings by 84 lots to 477 contracts.

 

"The spec side is very heavily weighted to one side of the ship," Man's Barnett said. "In that scenario, it doesn't take a lot to get a sharp move. And there have not been aggressive sellers on the way up, during the last two or three rallies.

 

"If the (U.S. Plains) rains dry up and we get another 10 days of hot, dry weather, we could rally another 30-40 cents, but I think today, we'll see how dedicated these longs are."

 

Cash U.S. hard red winter wheat basis bids were mostly steady Monday; soft red winter wheat basis bids were flat-firm; and spring wheat basis bids were steady to weak, grain merchandisers said.

 

In global wheat news, Wheat Australia Ltd. confirmed Monday it has ended negotiations to supply 350,000 metric of wheat to Iraq.

 

Syria said Saturday it is tendering to sell 50,000 metric tonnes of wheat.

 

Chinese wheat prices rose slightly Monday compared with a weak earlier, after the government said last week that the minimum purchase price policy would be implemented June 1.

 

Traders continue to eye reports from Argentina, following last week's news that Argentine wheat producers have agreed among themselves to a self-regulating system of export limits due to tighter supplies this year and domestic inflation.

 

Brazil's wheat industry, concerned about the possibility that Argentina might limit wheat exports, has asked the Brazilian government to temporarily eliminate an 11% tariff on wheat from other countries, an industry executive said Friday.

 

And the USDA estimated total 2006/07 grain production for Ukraine at 29.6 million tonnes (against 37.9 million, including 10.0 (18.7) million (tonnes of) wheat. Wheat area for 2006/07 was estimated at 5.2 million hectares. The planted area of winter wheat dropped from 6.3 million hectares last year to 5.1 million due to a combination of fall dryness and low prices.

 

"An estimated 10 to 11% of the planted winter wheat area will not be harvested due to the fall drought or winter damage," the USDA said. "Sowing reports indicate that farmers planted 0.5 million hectares of spring wheat, slightly lower than the official forecast of 0.6 million."