By Mark Hanson, Vice President of Merchandising
Wheat has largely been caught in the lower-end range for much of 2016 due to building ending stocks and an overall bearish commodity environment. Since mid-2014, the U.S. dollar index rose from .80 to the current .94. Along with worldwide wheat ending stocks rising 21 percent during the same period, the market has seen little concern about having adequate supplies. Wheat harvest has begun in the Southern Plains, and early consensus is that the crop will be very large. In the June WASDE report, the USDA has increased their U.S. yield estimate by 2.1 bushels per acre to 48.6. While they increased export projections by 25 million bushels to 900 million bushels and increased feed-use volumes by 30 million bushels to 200 million bushels, they are projecting ending stocks to reach 1.050 billion bushels. This is an increase of 39 percent from just two years ago. With projected stocks-to-use to reach 49 percent, any purchasing excitement in wheat has been limited.
Since late May, wheat has seen some changes. While some concerns have built up about the excessive rains in the EU, as well as lower production in India and fewer plantings in Canada, the wheat market has seen more support building up due to some concerns in the corn and soybean markets. While the recent buildup of wheat has started to raise concerns, demand for both corn and beans has picked up as well. The USDA lowered the 2016/17 corn ending stocks from 145 million bushels to 2.008 billion for next year. This was due to a 50-million-bushel increase to exports and a 95-million-bushel decrease to the current year’s ending stocks. Soybeans now see a pretty sizable 7.9 percent increase in exports, which leads to a 110-million-bushel decrease of ending stocks year-on-year to 260 million bushels. Since no adjustments were made to the yields for corn and beans, the recent weather issues are now beginning to be more relevant to the market.
June typically is a difficult month for rallies. With wheat harvest just beginning, and corn and beans growing, there normally is more selling pressure as farmers are more comfortable selling out stocks and locking in some of their new crop supplies. Below shows a 30-year seasonal pattern for December Chicago wheat:
This pattern is consistent with corn and soybeans as well. Once the harvest lows are established on wheat, and corn reaches the key pollination period, weather typically gains more relevance for market support. This year support showed up much sooner, most likely due to the market being overly bearish for so long. When the market wanted to cover their short positions, few fresh sellers were willing to come back in. This allowed corn, beans and wheat to make some impressive rallies. There is a bias building that a developing La Nina pattern will lead to hot and dry conditions later in the key July/August pollination and pod set period.
Technically, the recovery defined key support and resistance levels. The continuous Chicago wheat market established a well-defined peak in July 2015 and a key low in March 2016. The 50 percent Fibonacci retracement is at $5.26, which also showed strong resistance last fall. The recent rally made another attempt on testing this resistance point. While time will tell whether this will hold, currently, it appears that it will hold until some more material happens fundamentally to warrant a move through that key level. Below is the Chicago wheat continuous chart:
Over the next couple of months, the market will define itself further as clarity develops around true production and the impacts of actual demand. Weather will be one key factor through August, but U.S. Dollar strength and overall economic data will also factor in. Once the actual production is known, demand will again be the major factor for the market direction. Until then, it appears to be a technically driven market.