October 6, 2008
US wheat faces long road to break out of recent downtrend
Buried under the rubble of bearish fundamentals and a weak technical outlook, US wheat futures have a long way to go before extracting themselves from a weeks-old downtrend.
Benchmark Chicago Board of Trade December wheat on Thursday (October 2) extended its recent slide and closed more than 50 percent below its record high of US$13 per bushel, hit in February. The market bounced a bit Friday, with the contract trading near US$6.50 in early dealings.
Fundamentals for wheat are bearish as the world is expected to produce a record-breaking crop this year, analysts said. Farmers expanded plantings worldwide last year to take advantage of high prices and saw favourable growing weather.
Despite earlier concerns about dryness in the Southern Hemisphere, the markets have grown more comfortable with the size of Australia and Argentina's crops, analysts said. Demand for wheat has been solid but not strong enough to spark a reversal of the downtrend, they said.
"The fundamentals are so negative," said Louise Gartner, analyst for Spectrum Commodities.
Amid the absence of a bullish storyline, the best chance for a rally in wheat seems to be on the back of potential gains in CBOT corn and soy, said Tom Leffler, owner of Leffler Commodities. Corn and wheat are linked because both are used for animal feed, and all the crops compete for acres.
US wheat futures would need to overtake their 50-day moving averages to signal an end to their six-week-old downtrend, Leffler said. The 50-day moving average for CBOT December wheat is around US$7.80, about US$1.30 above the contract's current price.
"You've got to get back above the 50-day moving average to get a little respect on the charts," Leffler said. "For confirmation (of a turnaround), we need to get above it and close above it."
Most recent gains in wheat have been a result of short-covering and the unwinding of spreads, Leffler said. The markets climbed Tuesday, despite losses in corn and soy, after the US Department of Agriculture pegged quarterly wheat stocks below trade expectations, implying strong usage. The USDA also raised its forecast for US wheat production above expectations, which was bearish.
The USDA has repeatedly raised its world production forecast in monthly supply and demand reports. The agency last month put the crop at 676.28 million tonnes, up from its August estimate of 670.75 million and from 610.87 million last year.
"It just seems like it's impossible to find anything positive out there to help this wheat," Leffler said.
Traders continue to watch the weather in Australia and Argentina amid uncertainty about the impact of dry weather and frosts. However, the markets seem comfortable with assumptions that Argentina's crop will be poor and that Australia won't see another disaster after two years of drought-reduced production, Gartner said.
Australia's crop this year is generally expected to be 20 million to 24 million tonnes, up from roughly 13 million tonnes last year. A USDA attache report posted Wednesday pegged the crop at 21.6 million tonnes, down from the USDA's official September estimate of 22 million.
Assuming no major troubles, the start of active harvesting in Australia should apply more pressure to US wheat prices, analysts said. Australia will be "very aggressive" in trying to recapture its share of the export market after poor production cut its sales potential for the past two years, Gartner said.
Australia will likely try to undercut competitive bids from the Black Sea region and the US to make sales to Egypt and Iraq, two key buyers on the world market, Gartner said. Egypt and Iraq last week snubbed the US in tenders and bought Russian wheat.
"They've missed out on two years of sales," Gartner said about Australian farmers. "In order for them to regain their footing in those markets, they've got to be aggressive."
Tougher competition for export sales will only make it more difficult for US wheat to brighten its bearish tone, analysts said. As of September 25, 17 weeks into the wheat marketing year, total export sales were 63 percent of the USDA's 1-billion-bushel target for the year.
"Fundamentally, you have to see demand pick up," said Brian Hoops, president of Midwest Market Solutions. "Futures are trading to find the price level that will stimulate demand."
CBOT December wheat will need to close near US$7.60 to show the market has bottomed out, Hoops said. The area of US$7.60 to US$7.80 offers strong resistance, he said.
The contract Thursday fell through support at US$7.50, traders said. Gartner's next downside target is US$5.90, a level at which the market should be able to "catch its breath," she said.
On the upside, CBOT December wheat faces major resistance at US$7.70, Gartner said. The market needs to close decisively above that level to signal a change in trend, she said.
"It's really incredible how fast this thing is melting through these supports," Gartner said. "It's a little unnerving."
Winter wheat planting is underway in the US, and the markets could find some strength from indications that there will be a "significant" reduction in acres, an analyst said. Plantings are expected to drop a few million acres from last year, but recent rains have boosted soil moisture and could minimize switching to other crops. The USDA's lofty insurance price of US$8.58 for wheat also will discourage switching, analysts said.