Todd's Take

When we have that unexplainable feeling of having experienced something before, we call it a deja vu moment. What do you call it when you realize you actually did experience the same thing before? Short-term memory loss?

That happened to me recently when I came across a Todd's Take I wrote two years ago, "HRW Wheat Biding Time" ( https://www.dtnpf.com/…).

At the time, March KC wheat was trading a nickel higher than Thursday's close of $4.28 1/2. USDA was estimating 935 million bushels (mb) of U.S. ending wheat stocks and a record high 9.83 billion bushels (bb) of world ending wheat stocks.

Today's wheat supplies are estimated a little higher, at 1.014 bb for the U.S. and 10.59 bb for world ending stocks, both for 2019-20. The depressing impact on prices is much the same. Two years ago, spot KC wheat prices were near their lowest level in 11 years. Today's slightly lower spot KC wheat price is near its lowest level in 13 years.

From a fundamental point of view, both situations look bleak in terms of price expectations. One difference that does show up is that noncommercials were more bearish in 2017 than they are today, holding 10,116 net shorts versus last week's net short total of 2,476.

The point of my 2017 column was that, in spite of the bearish fundamental outlook for prices, it was important to step back and look at wheat from a long-term perspective. A chart of spot KC wheat prices going back to 1970 shows the market has a strong balancing influence -- something that doesn't get talked about in most market commentaries.

In the case of KC wheat, bullish adventures witnessed in 1974, 1996 and 2008 saw prices return to their 10-year moving average within a couple years.

Likewise, the bearish adventures of 1986 and 1990 saw low wheat prices return to their 10-year average within a couple years. The four-year period of 1998 to 2001 was related to the Asian recession and marked the longest time that spot KC wheat prices submerged without coming up for air. The imbalance was corrected in 2002 when prices returned to the 10-year average with help from dry weather.

After laying this same information out two years ago, KC wheat prices promptly turned higher the following week and pushed on, finally peaking at $6.10 1/2 in the first week of August 2018. As you might have guessed, the goal was reached as $6.10 1/2 was slightly higher than the 10-year average at the time.

Here on the Friday before Thanksgiving of 2019, I cannot promise that spot KC wheat prices will complete this deja vu experience and promptly return to the 10-year average that is now sitting at $5.91. And just as I couldn't provide a bullish argument for wheat prices two years ago, I don't have a good one now.

But once again, we are confronted with the shortcomings of fundamental analysis -- a method that is good at explaining current prices, but not so good at predicting tomorrow's prices.

The value of stepping back and looking at prices from a long-term perspective is that we are able to recognize the market's strong balancing influence -- a moderating force that we cannot see up close.

We can't know what the future holds, but we can see from history that extremely low prices, like Thursday's (11/21/19), tend to be bullish opportunities in disguise, just as they were two years ago.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/CZ)

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