Aussie Rains Stall Wheat Early
Fundamentals
Wheat futures are modestly lower this morning, on projections that Australia's production of the grain may jump substantially after heavy rains blanketed much of the growing region. The Australian Bureau of Agricultural and Resource Economics-Bureau of Rural Sciences forecast that the 2010-2011 crop output may jump to 25.1 million metric tons from 21.7 million metric tons -- a jump of over 15%. This news may only be a temporary setback for the Wheat market, which is seeing strong demand due to a weaker US Dollar and crop production setbacks in Asia. The USDA lowered its global production projection for the fourth consecutive month this past Friday, albeit by a smaller amount than traders had expected. Even with the tight supplies for this crop year, traders have to wonder if prices may have gotten a bit too high relative to fair value. Even with all of the crop problems facing farmers abroad this year, we are coming off several years of ample harvests. Prior surpluses will likely not be worked down completely, which could potentially limit the upside potential of the market. One of the key driving forces behind the Wheat market's rally has been fund buying. This past week was no different, with index funds adding more than 7,000 contracts last week. In total, non-commercial reportable positions totaled over 22,000 contracts long. With lack of opportunities in other markets, traders could possibly maintain a substantial long position for the foreseeable future. This may support the market, despite fears that prices may be higher than they should be
Trading Ideas
The Wheat market has extremely strong fundamentals at the moment, but prices have also moved quickly higher. It remains to be seen if speculative interest in the Wheat market can sustain itself. Some traders may wish to use the chart as guidance going forward. A breakout above 800 could be seen as significant, as could a downward breakout below 650.
Technicals
Turning to the chart, we see the December Wheat contract trending higher since the market came back to the 655 level in mid-August. Prices have initially been unable to cross through the 750 mark, despite testing the level several times over the past week. This and relative highs near the 800 level could be barriers for the December contract. On the Downside, the 650 mark could be a key level for Wheat. The 20-day momentum indicator is showing bullish divergence from the 14 day RSI, which can be seen as bullish in the near-term.
Rob Kurzatkowski, Trading Specialist
