TOP FARMER INTELLIGENCE – Weekly Perspective by Bryan Doherty
WEAKER WHEAT?
On September 3, July 2020, Chicago wheat futures bottomed at 4.68-1/4, reversing a downtrend when prices peaked in late June. Futures then went on to rally just over 1.20, peaking at 5.89 on January 22. Futures posted a rather ominous technical signal (bearish key reversal) and have since slid with a more recent low established at 5.14, a drop of 75 cents. More importantly, prices violated price chart support and it now looks as though wheat futures are destined to move even further to the downside.
Ironically, wheat futures rallied at a time when both corn and soybean prices were struggling. This seems somewhat odd, yet from a more macro perspective, there was good reason for the rally. History suggests row crop prices have a tendency to move together, yet there was reason to suggest differently this year. Russia, the world’s leading exporter of wheat, was said to be contemplating limiting wheat exports. This grabbed traders’ attention, suggesting rumors that Russia’s crop from the previous year may have been overstated had validity. U.S. exports, on a week-to-week basis, were stronger than expected. At the same time, the Russian ruble was trending higher throughout fall, helping keep U.S. wheat competitive on the world market. When energy prices rally and the ruble inflates, it can make wheat in other exporting countries less expensive. Russia’s financial health is tied to the energy markets, as oil sales are important to Russia’s economy. Energy prices rallied throughout fall. Also supporting wheat prices was weather, as continuous dry conditions in Australia, Europe, and Argentina, coupled with a wet fall planting season in the U.S. (limiting soft red winter wheat acres), helped set the stage for a price recovery.
Yet, since mid-January, wheat prices have been on a decline and looking weak. In recent weeks, sharp declines in the energy complex (as well as the Russian ruble) have resulted in slower U.S. export sales. Technical formations of price charts point lower. A head-and-shoulders formation is in place. This is a formation where prices, in an uptrend, form a left shoulder and set back, only to rally above the left shoulder to form a head, and once again set back, only to rally a third time. The third rally fails to take out the previous high. If prices instead slide, they form the right shoulder and a neckline. The distance from the top of the head to the neckline indicates a downside objective for price. The neckline on July Chicago wheat is near 40 cents, which means if prices break the neckline, which they did, wheat prices should drop from roughly 5.50 to 5.10. Last week’s low was 5.14. An additional weak technical signal occurred when prices slid through an upward trendline, a line that connects the dots from multiple low points in the uptrend. Once futures break through this, it could also be a signal for weaker prices ahead. An even stronger negative signal is when prices break through the support line, recover back up to the line and then fail. That is exactly what the wheat market did, adding to the bearish technical picture.
Fundamental analysis would argue that wheat prices have little reason to recover in the months ahead. As winter wheat breaks dormancy in the northern Hemisphere, it is just a matter of time before the market anticipates harvest. Additionally, world carryout is projected higher at 754 million metric tonnes compared to the 2018/2019 737 million metric tonnes. This likely means additional price pressure as the crop matures. Expectations are that the September low of $5.14 is the downside harvest target. Bottom line is that wheat prices turned the corner in January and have provided multiple technical signals and fundamental reasons to warrant further downside price projections. Suggestions are to forward sell and buy calls in case weather is a problem, or buy puts which establish a price floor and leave cash grain unpriced for upward appreciation.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Author
Lisa Heder