Canada Markets
Wheat May Finally Be Ready to Join the Corn Rally
The impressive rally in corn continues on, seemingly unphased by the political noise around it. Planting delays for the larger, more important second (safrinha) corn crop in Brazil takes much of the headline credit, but the roots can be traced back to tight supplies in major exporting countries as covered in the earlier post https://www.dtnpf.com/….
For today's contribution, I would like to point out how wheat looks like it's on the verge of a short-covering buying spree by the managed money traders. With a combined net short position of 634 million bushels (126,923 contracts as of Jan. 21) between Chicago and Kansas wheat markets, the development should not be taken lightly. For perspective, the combined ending stocks of the two varieties are only expected to total 494 mb in 2024-25 according to the USDA.
Even though there are many bullish factors that the market has chosen to ignore, the trigger appears to be how small the premium has reached compared to the price of corn. As you can see in the accompanying chart, when corn prices come within $0.50/bushel of Chicago wheat, feeding wheat becomes economical, especially in quantities large enough to impact available supplies. Considering 5.775 billion bushels of corn is expected to be fed this year compared to only 120 mb of wheat, it doesn't take much of a substitution of wheat for corn to have a dramatic impact on wheat supplies and ending stocks.
Now that March corn futures are challenging $5 per bushel (bu), anything less than $5.50/bu for March Chicago wheat attracts a lot of buying interest. The latter closed at $5.32/bu Monday morning and has rallied to $5.56 currently (Jan. 29) as corn has extended its gains.
As mentioned, there are many reasons to be bullish if one wants to be. The declining ending stocks estimates for major exporting countries (just like in the corn market) is a prime example. The ending stocks are projected to fall to a combined 31.45 million metric tons (mmt) for 2024-25 from 40 mmt last year and 47.55 mmt in 2022-23 according to the recent USDA World Agricultural Supply and Demand Estimates (WASDE) update. Those countries include Argentina, Australia, Canada, the EU, Russia and Ukraine.
It is worth noting that the news headline of huge global supplies of 258.82 mmt should be comforting to no one, given 51.4% of those stocks lie within China and will never be available for export. Much more important is the fact that world carryover is projected to fall to 87.16 mmt in 20245-25 from 106.18 mmt the previous year when China is left out.
With wheat being almost impossible to kill -- actually benefitting from stress, resulting in the plant stooling out and adding tillers -- traders have been conditioned to sell into any rally based on a weather-stressing event. That said, freeze damage in the U.S., drought stress in the Black Sea region and unusually warm weather leaving the crop vulnerable in the latter may inspire buying eventually.
From a technical point of view, bottom formations developing during the last number of months are likely to inspire short covering as well, given the changing risk/reward profiles.
Monthly charts show a firming off divergence bottoms where prices continued to make new lows until July 2024, while the Relative Strength Index (RSI) did not; this signals an increase in the underlying strength.
The weekly continuation charts have very impressive looking saucer bottom formations developing with recent lows not taking out the July lows. In general, the longer it takes a saucer to form, the more extreme the rally tends to be once prices start to work higher. In this case, the current saucers started forming two years ago.
The daily charts have excellent looking divergence bottoms of their own. As the market kept trying to break down in early January, the RSI showed it was building internal strength. Seller exhaustion appears to finally be taking hold, as the money managers give up on their expectations for lower prices and start covering their short positions.
Prior to the initial short covering seen last week, they had amassed a net short position of 131,999 contracts or 660 mb in Chicago and Kansas combined. Following an initial price spike on Jan. 21-22, it appears that they have decided all the topics covered here are enough of a reason to begin covering. Time will tell.
Also see, "Have US Wheat Markets Finally Turned the Corner?" https://www.dtnpf.com/…
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I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.
Mitch Miller can be reached at mitchmiller.dtn@gmail.com
Follow him on social platform X @mgreymiller
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