Weekly Market Analysis: A New Contract Low for Wheat

Reacting to the release of the monthly update by the USDA, the new crop wheat contract in the Kansas City market made a new contract low on Thursday before a small recovery on Friday. The wheat stocks in the United States and the World continue to inflate.

The USDA in their March Supply and Demand Report released on Wednesday raised ending stocks in the United States by 20 million bushels. They left their export number unchanged but lowered domestic usage by 20 million bushels. Ending stocks in the United States are at one billion bushels. This is the largest ending stock number since the June 1988 report. Many analysts predict the export number in future reports will drop and the ending stock number will increase. World ending stocks for wheat increased 900,000 metric tons.

The shifting of wheat demand out of the United States reflected in the data from the Former Soviet Union countries. Their wheat production in 1994-95 was 60 million metric tons. In 2008-09, this country produced 116 million metric tons. They have produced a surplus and are now the major competitor for world wheat exports. Their location in the world is a sizable advantage over the United States since most of the wheat importers are in their area. In the mid-70’s, the United States had 50% of the world wheat export business. This year, we will ship 18% of the world total. This would be a 38 year low for the United States. This shows the drag on the wheat price is on demand side of the equation for the United States.

The positive side of the wheat market lies in the drop in winter wheat acres and the oversold condition found on the charts. There is little talk about the large drop in winter wheat plantings in the United States, as the moisture profile is good. The weather needs to stay ideal for a second year of high wheat production. Freeze, heat and a lack of moisture at filling time could chip away at yields. If one was just a chart trader, the trend indicator is at the bottom of the graph and throws up a caution flag. The wheat price is due for a bounce. The recommendation for producers is to take advantage of a spring rally and move some grain. Sell remaining old crop inventory and forward price some bushels of new crop.

PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH TRADING FUTURES AND OPTIONS CONTRACTS EVEN, WHEN USED FOR HEDGING PURPOSES. PLEASE CAREFULLY CONSIDER YOUR FINANCIAL CONDITION BEFORE INVESTING IN FUTURES AND OPTIONS CONTRACTS. FUTURE’S TRADING IS NOT SUITABLE FOR ALL INVESTORS. OPTIONS CAN AND DO EXPIRE WORTHLESS. IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST SEVERAL YEARS. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY AFFECT THE RESULTS.