Opposites Funds have gone from having a net long position, while the commercials have been buying
The wheat market has been under pressure since prices peaked in July 2012.
So what has changed since last summer’s high?
- Wheat futures prices have declined $2.50 per bushel and cash prices have declined $1. The $1.50 difference in price is due to a better basis and a lower Canadian dollar.
- We have an open market and it has been working as well as anyone could have hoped. The $40/tonne improvement in basis levels since harvest is an indication of strong export demand and year-to-date producer deliveries are two per cent ahead of last year.
- Wheat is now cheaper than corn on the nearby futures contracts at the Chicago Board of Trade (CBOT) and this anomaly never lasts for long.
- USDA in its February Supply & Demand report estimated a global wheat carry-out of 176.73 million tonnes in 2012-13, which is a 10 per cent reduction from the 196.54-million-tonne carry-out in 2011-12. In fact, world wheat ending stocks have declined in each of the past three years.
- The technical indicators such as the RSI and stochastics are in an oversold position. The funds have gone from having a net long position in wheat to a net short position, while the commercials have been adding to their long positions and getting out of their short wheat positions at the CBOT. Herein lays the potential for a short-covering rally.
From a technical perspective, the short-term trend is down and the long-term trend is up. Chart analysis can be used to determine the price trend and where support and resistance to the trend may be anticipated. Support is illustrated as “A” in the accompanying chart.
Within the major trend there are a series of prominent peaks and valleys that can be of several weeks’ duration. The lesser swings are the intermediate trends. Finally, there are small fluctuations within the intermediate moves that are the minor trends.
Over the past 30 years I have witnessed on numerous occasions where the news was incredibly bearish and the hype was for prices to continue the short-term downtrend, but instead prices turned up with the major uptrend on the long-term charts remaining firmly intact.
I was reminded of this in early January 2013 when the canola futures market dropped down to $575 per tonne. Many in the industry were expecting prices to go lower, but they instead bounced off an area of support (the lower boundary of the uptrending channel, which depicted the major uptrend on the monthly chart) and quickly rallied $75 to $650 in only four weeks.
The wheat market is in a similar situation now. Given the short-term downtrend, the news is incredibly bearish. However, prices are approaching a major uptrending line of support “A” on the monthly chart.
I’ve also illustrated a very similar line of support that was challenged for six years (2000-05) without being breached.
Back then wheat prices were unprofitable at $2.95 per bushel and I recall meeting farmers in Saskatchewan who were willing to rent their land out to anyone who would cover their taxes. During those days I remember explaining at farm meetings I held across the Prairies that this line of support would soon be the foundation for higher prices. In January 2006, prices turned up and rallied until they peaked at a new historical high in 2008.
This is a classic example of the benefit of understanding trends, both short and long term.
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