Todd's Take

Is HRW Wheat As Bearish As It Looks?

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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From a trader's viewpoint, March KC wheat prices have been falling for a year and a half, and show little sign of turning higher yet. From a fundamental perspective, prices are down over 50% from the 2022 high and are cheap enough to attract commercials to the long side of the market -- a possible sign support could be near. (DTN ProphetX chart by Todd Hultman)

Second only to a 30% drop in spot corn prices this year, spot prices of KC wheat are about to post the next biggest percentage loss in the 2023 grain-related sector, worse than the other two U.S. wheats' futures prices. For many traders who try to make a living chasing trends, there is no reason to be long KC wheat. Not only did spot KC wheat prices have a bad performance in 2023, they have been trading lower for a year and a half and finished the year near their lowest prices in over two years. The close on Thursday, Dec. 28, at $6.43 3/4 remains well below the 100-day average at $6.87. Prices have been so weak, they haven't even touched the average since Aug. 2.

From traders' perspectives, the most hopeful thing we can say about March KC wheat is that prices posted a bullish weekly reversal four weeks ago and haven't been near the low of $5.95 since. The first attempt to trade below $6.00 was met with a quick rebuff.

Going by USDA estimates, there isn't much of a bullish argument either. In 2023-24, USDA estimates all U.S. ending wheat stocks at 659 million bushels (mb) or 35% of annual use, the second lowest ending stocks-to-use ratio in 10 years. That is actually somewhat hopeful for wheat prices in general, but KC wheat futures represent hard red winter (HRW) wheat, grown in the southwestern Plains. USDA is estimating 280 mb of ending HRW wheat stocks or 48% of annual use, a plentiful amount that also represents the third lowest stocks-to-use ratio in nine years. Making matters worse, export sales commitments of HRW wheat are down 36% in 2023-24 from this time a year ago, the least popular of all the U.S. wheat classes.

The one advantage that KC wheat does have going for it at the start of 2024 is that it is cheap. Momentum traders may have no use for KC wheat at the moment, but commercials certainly do, representing end users that want to buy wheat cheap and take it off the market.

Commercials started turning net long in KC wheat back in August when prices were falling below $8.00 and added to positions as prices got cheaper. Net longs reached nearly 38,000 shortly before Thanksgiving as prices neared $6.00 and specs put on their largest short position on record. Once prices reversed higher after hitting $5.95 on Nov. 28, specs covered over half their shorts and commercials lightened net-long positions on the way up. It was the second sign of technical support this year and looks reasonable on a long-term chart; $6.00 on a long-term chart of March KC wheat prices happens to be the same level resistance was found in the years 2015 to 2020.

Here at the end of 2023, I can't come up with a strong bullish argument for why KC wheat prices should trade a lot higher, but a new trading range between roughly $6.00 and $7.50 in 2024 would not be unreasonable. For now, Russia's low prices remain a bearish influence and early winter wheat conditions in Russia are generally favorable for 2024-25 crops. Even so, surprises do happen and we'll continue to monitor conditions in the year ahead.

May you have a safe and happy New Year!

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

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

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Todd Hultman