Wheat prices have rallied, but analysts aren’t sure the rise is justified or sustainable.
They say wheat prices have piggybacked on corn’s rapid rise on the panic of users and speculators who had market positions based on expectations of falling prices. Also a factor is the re-entry of commodity funds onto the long side of the grains markets.
“I know there are many here (in Chicago) on the user side who are looking for another decent break so that they can go ahead and get some wheat bought, because they got caught flat-footed,” said Archer Financial Services broker Brian Henry July 9.
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“It looked like a $4 commodity 10 days ago, but now it’s over $5.”
There are weather problems in former Soviet regions, but that doesn’t justify the rally.
“The wheat rally has had zero behind it,” said Union Securities broker Ken Ball.
The U.S. Department of Agriculture’s July 9 supply and demand report that suggested a 1.1 billion bushel U.S. wheat carryout for 2010-11 shattered any illusions that wheat stocks will be tight next year.
“The wheat numbers just confirmed that there’s just nothing there (behind the recent rally),” said Ball.
Analysts say corn provided the true impetus. Since the USDA found June 30 that corn acreage and stocks were lower than expected, corn and wheat have rallied in near lockstep.
Henry said the twitchiness in corn is due to voracious demand.
“We’re in a situation where we have to almost continually grow record crops of corn to meet the demand,” said Henry. “We really need a 165 bu. per acre yield, which I’m not sure is there, and we need to see a reduction in use from either (livestock) feeders or ethanol, and it’s going to take higher prices to do that.”
USDA left untouched its projected corn yield at 163.5 bu. per acre. That sets up an anxious summer, in which the crop has to develop nearly perfectly to meet users’ needs.
“We’re always one step away (from a disaster) with six weeks to two months before they start wrangling this thing towards the bin,” said Henry. “There’s time for this crop to go haywire.”
Henry and Ball don’t feel comfortable speculating on wheat’s future price direction. Both see little fundamental support for a significant rally now, yet the strength of the rally to this point can’t be denied.
“We might go right back down again … but the funds have stepped in again,” said Ball.
The rally in corn and wheat appears to have inspired trend-following funds to step back into the market after having gone short for months, and they tend to exaggerate and extend trends. Ball also attributed the strength in soybeans, which did not fall significantly after bearish news in the USDA report, to the renewed interest of commodity funds in being long the market.
“I’m surprised the beans were as firm as they were, but the funds are committed to playing around there.”
Henry thinks canola could rally further. After a surge to about $429 per tonne caused by wet prairie conditions, canola has stabilized.
“The canola market’s got to have more upside. It’s made a nice move, but it seems like maybe it’s consolidating a bit before it takes another good leg (up),” said Henry. “I wouldn’t be surprised if it hit $500.”
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’06 -’07 ’07 -’08
’08 -’0949,21755,82168,016596,106611,231
683,263
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’09 -’10
’10 -’1160,31460,303679,851
661,067
