Rain Makes Grains, Except in the Plains?
Fundamentals
Wheat futures continue in the doldrums, hovering near the lows of 2009, as improved weather conditions in the Plains "Hard Red Winter Wheat Belt" and a continued weak world economic outlook are weighing on prices. The southern Plains HRW Wheat growing area in Texas and Oklahoma have been mired by drought conditions for most of the winter. The Texas Wheat crop was rated 57% poor to very poor as of this past Sunday, according to the National Agricultural Statistics Service. However, precipitation has finally arrived in this parched region, which has elevated some of the dryness concerns. However, it is still too early to tell if this moisture will be enough to dramatically improve crop conditions, and the possibility exists that a fair amount of the Texas and Oklahoma Wheat crop will be abandoned if yields are not sufficient to justify the expense of harvesting. Conditions in the Soft Red Winter Wheat growing areas in the Eastern Midwest are vastly better, with much of the crop rated as normal to above normal. Continued economic uncertainly has put a bid into the U.S. Dollar, which can hurt U.S. exports as a stronger Dollar makes U.S. Wheat more expensive for foreign buyers. Grain traders will be keenly focused on this morning's USDA Prospective Plantings report to be released at 7:30 am Chicago time. U.S. producers are expected to plant nearly 59 million acres to all Wheat types in the 2009-10 crop seasons, down just over 4 million acres from 2008. Last year's Wheat acreage was significantly higher due to record high Wheat prices in the 1st quarter of 2008.
There are three major Wheat varieties grown in the U.S. that have futures contracts listed. Hard Red Winter Wheat (normally used for bread making) traded on the Kansas City Board of Trade, Soft Red Winter Wheat (used in making cookies and cakes) traded on the CME Group, and Hard Red Spring Wheat (a higher protein Wheat) traded on the Minneapolis Grain Exchange. Given the significant differences in crop conditions between the U.S. Hard Red Winter Wheat and the Soft Red Winter Wheat crops, traders may wish to consider a spread trade of buying the new-crop July 2009 Kansas City Wheat and selling the new-crop July 2009 Chicago Wheat. The July Kansas City futures contract is currently trading at a 41 cent premium to the July Chicago Wheat contract, and a trader who chooses to initiate this spread would want to see the premium widen. Traders should remember that spread trading may not necessarily be less risky than holding an outright futures position, and there is a possibility that one contract could be trading higher and the other lower on any given trading session. Other factors such as weather conditions (especially during harvest), demand for a specific type of Wheat, and speculative activity can affect this spread.
Technicals
Looking at the daily chart for July K.C. Wheat, we notice a potential triangle formation developing. This technical formation occurs in a market making continually lower highs and higher lows. Traders usually await a breakout from this consolidation on higher than average volume to "confirm" the direction of the next move in prices. We are currently holding just above the lower trendline in this formation, but yesterday's volume was less than stellar (mostly due to position squaring prior to this morning's USDA report). Momentum as measured by the 14-day RSI favors the bears, with a current reading of 41.79. Major support for July K.C. Wheat is seen at the December 5th lows at $5.19, with major resistance seen at the recent highs made on January 6th at $6.90 ¾.
Mike Zarembski, Senior Commodity Analyst
