Canada Markets

Wheat Futures Challenged to Maintain Current Uptrend

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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December hard red spring wheat futures ended lower on Tuesday after testing retracement resistance at $4.98 3/4/bu. for the second straight session. The $5 level seems like it's going to be a tough level to crack. The blue line on the second study represents the Dec/March spread which closed unchanged at minus 10 3/4/bu. The latest CFTC data (third study) shows investors or noncommercial traders becoming increasingly bearish. (DTN graphic by Nick Scalise)

One positive piece of fundamental data to come out of the USDA's monthly World Agricultural Supply and Demand Estimates report on Monday was the lofty expectations for world demand.

While global production is expected to reach a record 744.85 million metric tons in 2016/17, up 10.04 mmt or 1.4% from 2015/16, the rate of increase in global demand is fortunately higher.

Global demand estimates are showing an increase from 709.7 mmt in 2015/16 to Monday's September estimate of 736.68 mmt, a 26.98 mmt or 3.8% year-over-year increase in demand. This estimated demand is growing at almost three times the rate of production. This represents the first time in seven years that year-over-year demand growth could exceed production growth. Over the past five years, the average annual increase in global production growth was 1.4% while the average annual growth in demand fell short at 1.1%.

This increase in demand, based on a combination of higher expected feed and food use, led to a greater-than-expected reduction in estimated ending stocks in Monday's report, although the bad news is that ending stocks are still estimated at a record 249.07 mmt, up 8.18 mmt or 3.4% from 2015/16. This represents 33.8% of estimated global use, an improvement from last month and just .1% improvement from 2015/16.

A higher U.S. dollar trade and spill-over from the row crops weighed on wheat prices on Tuesday, with winter wheat contracts leading the move as December contracts more than clawed-back gains achieved on Monday. The most bearish move was seen in the soft red winter wheat market, with the December contract trading both higher and lower than Monday's trading range to form a bearish outside-day trading bar. This was confirmed by its lower close, suggesting the short-term uptrends which began early this month could be in jeopardy.

As seen on the attached chart, the December hard red spring contract tested resistance at $4.98 3/4 per bushel in each of the past two sessions, a level representing the 38.2% retracement of the move from the August high to the August low. Technical selling is also bound to take place at the psychological level of $5/bu. This contract seems trapped in its 20-cent range which has governed trade over the past 11 sessions.

The blue line in the second study represents the December/March close, which ended unchanged from Monday at a 10 3/4-cent spread this session, a sign of a neutral response by commercial traders and further selling by noncommercial traders or investors moving the market this session. Directly below in the third study, the histogram bars show the move back into a net-short futures position by noncommercial traders as of the most recent Sept. 6 data.

The lower-study reflects the spread between the continuous active HRS wheat contract, less the continuous active HRW contract. After closing at a $1.06/bu. premium to HRW as recent as Aug. 17, today's close is 77 1/2 cents (HRS over HRW) and is close to testing the lowest levels reached since mid-June.

The first study represents the daily stochastic momentum indicators which are showing signs of a sideways move. While not shown, the weekly momentum indicators are also drifting sideways while in over-sold territory. In the absence of supportive news, this trend could continue for some time.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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