Hot Russian Weather Stokes Wheat Rally
Fundamentals
The scorching temperatures across Russia's growing region have Wheat buyers scrambling to lock-up supplies of the grain. Russia's exports are expected to be cut in half, which could make a major dent in the global surplus. The country had downplayed the severity of the crop problems, so when news broke about the true extent of the damage, it caught many traders off guard. With the shrinking supply becoming more and more evident, many Middle Eastern nations have been looking south to Australia to satisfy their needs, while other nations are likely to turn to the US for their Wheat. The bad news for Russian farmers has been extremely good news for US farmers, who are enjoying favorable growing conditions. Fund and speculative buying has been extremely heavy, as evidenced by the Commitment of Traders report showing the net long position for CBOT, MGEX and KCBOT Wheat jumping by 16,102 contracts from 7/20 to 7/27. In addition to the extremely bullish market fundamentals, outside forces have been favorable for the grain complex. The Dollar Index has fallen to its lowest level since April, bolstering demand for commodities. The GDP report on Friday had an inflationary chain deflator number, which could influence more traders to go long commodities. While the fundamental news is extremely bullish, prices may have risen too quickly over too short a period of time. CBOT Wheat has risen over three dollars since mid-June, which may trigger some profit-taking. Time will tell whether the panic buying will be able to hold or if prices reverse course.
Trading Ideas
The fundamental and technical outlooks for the Wheat market are extremely bullish at the moment, however prices may have risen too quickly. Traders may wish to watch how the market behaves in the coming days. If prices are able to hold the breakout above the 677 level, this could possibly be a sign that the market is truly breaking out, and some traders may wish to enter into a bullish strategy. Conversely, failure to hold 677.00 could possibly be seen as a setback, signaling that the market may fall back into the wide sideways range it has been in since the fall of 2008. In this case, some traders may wish to consider entering into a bearish strategy.
Technicals
Turning to the chart, we see the December Wheat contract rallying beyond the June 2009 high of 677.00. If prices are able to hold here, the Wheat market may finally be able to break out of the 20-month funk that it's experienced. The market has not had a discernable trend since 2008. Failure to hold above the 677 level could be a major letdown for Wheat bulls that have been chomping at the bit for prices to finally break out of its sideways channel. The RSI indicator is giving overbought readings at 86.64.
Robert Kurzatkowski, Trading Specialist
