Australia Adds to Wheat Woes

Tuesday, September 13th 2011

The fundamental outlook for Wheat seems to favor the bear camp at the moment, as the large Australian crop may increase global ending stocks. Corn's impact on the Wheat market, however, cannot be discounted. Higher moves in Corn could not only shift overall grain sentiment, but also drive substitution demand for Wheat. Technically, Dec Wheat is at a fairly significant support level near 720. Traders may look to see how the market behaves in the coming sessions. If the December contract closes below the 720 mark, some traders may wish to possibly consider shorting the futures, with a downside target near 650. If the market bounces from 720, some traders may choose to think about going long the futures, with an upside target of 800.

Fundamentals

Wheat prices have come under pressure lately, due to a large US crop and steady rains in Australia. The bumper crop in Australia may reach record levels, increasing world supplies of the grain. This has largely been priced-in to the market, and many traders are now waiting on the USDA's ending stocks figures to determine the longer-term direction of the market. The high price of Corn and relatively low price of Wheat could lower the ending stocks figure due to feed substitution. While the bumper crop in Australia is expected to be large, there are still many skeptics that suggest the Australian crop estimate of 26.2 tons may be a little bit too high and could only be achieved if conditions remain ideal. The stronger US Dollar could also have a negative impact on prices, as it could lessen demand for US grain.

Technical Notes

Turning to the chart, we see the December Wheat contract falling rather dramatically after testing the 800 level. Prices are now at support at the 720 mark. Failure to hold this support suggests that prices may break down to the 650 mark. If, however prices do hold here, the 800 level could be tested once again, as there is no significant resistance level between 720 and 800. Prices have broken the 20 and 100-day moving averages, and the 50-day is within the market's sights. Failure to hold the average could have a negative impact on prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst