Canada Markets

2013 wheat futures have perhaps shown reason for one to take or protect potential profits by pricing a small portion of expected production.

While the December 2012 wheat futures reacted to this summer's Midwest drought, the price rose from a low of $7.34/bu. the week of May 14 to a high of $10.34/bu. the week of July 23, a gain of $3/bu. or 40.9%. Prices have since retreated to today's close of $9.13 3/4, a retracement of $1.20 1/4/bu., or 11.6%.

New crop futures, however, rallied from a low of $7.63 1/2/bu. the week of June 4 and reached a later high the week of September 10 at $9.65 1/4/bu., a gain of $2.10 3/4, or 26.4%. The retracement since the contract high has only been 37 3/4 cents or 3.9%.

New crop wheat futures have been supported by concerns of dryness in the U.S. winter wheat growing area. The most recent USDA Crop Progress report has lowered the winter wheat rating to 34% in the Good to Excellent category, the lowest rating ever for this date and compares to last year's rating of 50%. The U.S. drought monitor continues to reflect a dire situation in the Southern Plains region, while higher-than-normal temperatures in the past month have added to the level of concern.

To understand the significance of the hard red winter crop in the U.S., the most recent USDA projections for 2012/13 would indicate HRW to make up 44.25% of the total wheat production, which compares to HRS, which makes up just 22.26% of the total projected wheat production. Any prolonged concern surrounding the hard red winter crop will support the entire market. One should consider that any potential price-impact from crop problems in the red winter crop is more likely to present itself in spring when the crop comes out of dormancy.

Looking at the attached chart of the December 2013 weekly hard red spring contract, we see that December 2013 weekly HRS futures have retraced from their September high to $8.89 1/4/bu. in early October, just slightly above technical support found at the contract's 38.2% retracement level. Since then it has rallied to its 23.6% retracement level of its earlier uptrend, and seems to have found support at this level, which is at $9.17 5/8. This week's rally has also seen the future close over its 20-week moving average, which continues to trend higher.

Also of interest is the fact that this week's trade is well within the range of last week's trade, or in other words, represented by a weekly bar that has a lower weekly high and a higher weekly low than the previous week. This is referred to as an inside bar, and can indicate a change in sentiment. The greater the extent that the first bar encompasses the second, which in this case is significant, the better, in terms of a change in direction. Also, this pattern is confirmed with a lower trade volume on the second or inside day, as is indicated on the chart.

Weekly stochastic indicators are trading sideways, in the dead-centre of the chart, indicating a lack of momentum in any given direction.

The question remains whether this is an attractive price to be hedged at. By referring to DTN's five-year Minneapolis wheat price probability chart, available to DTN Grains Pro subscribers, we see that the last trade on the chart, at $9.29 1/4, can be compared to the nearest bar on the probability chart of $9.25/bu. At this bar ($9.25/bu.), prices have only closed higher approximately 22% of the time over the past five years. This is certainly a respectable level to start. Note that the market snapshot indicating a last trade of $9.29 1/4 was taken late-morning, which compares to the actual close of the day of $9.27 1/2.

It's also important to note that this price probability is just one of six factors utilized in the DTN Strategy section which is available to subscribers.

Cliff can be reached at cliff.jamieson@telventdtn.com

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