Market Perspective

Over the last month the price of wheat has been in a fairly narrow trading range. That relative calm has belied some of the powerful forces that have been influencing the grain markets both globally and locally. The futures markets are the backbone of the grain markets, for better or worse. And over the last month the speculative funds have had a major influence on the market by acquiring a record short position in wheat and a very sizeable short position in corn, largely based on the anticipation of a record corn harvest. Up to just recently, the perception has been that the weather in the cornbelt has been pretty much ideal, despite the fact that crop ratings for corn and soybeans have actually showed a steady decline over the last month. Now, with the weather turning hot and dry, the estimates for both corn and soybeans have been trimmed, and the speculative funds have to exit their positions. That is what happened on Monday.

Technically corn has broken its downtrend on the charts, and soybeans are looking at contract highs. These are factors that speculative funds look at more than even the fundamentals and, since they have been in control of the market for the past month, the technical factors are playing a larger role at this time. Wheat to this point has been a follower of the corn and soybean rally. The funds did cover a small percentage of their short position on Monday. As the markets approach First Notice Day this Friday, it will be interesting to see how much the funds unwind their positions ahead of the delivery period for the September contract, since they have no physical commodity to deliver.

The futures markets have a major influence on prices locally, but they are not the only factor. Local wheat prices did not follow the futures lower, penny for penny, on the recent decline. The basis levels for all classes of wheat have strengthened as prices have fallen. A lack of farmer-selling was the main reason. Also, export business has been brisk and continues to run well ahead of USDA’s estimate for total sales. Sometimes supply-and-demand fundamentals actually influence the market. And the reverse is also true. On Monday, when futures moved sharply higher, the Portland markets also moved higher, but selling from the country final broke loose, and white wheat cash markets backed down in the face of the selling pressure.

How long this bounce in the futures markets continues remains the big question. This is the weather market that usually happens in July and, combined with the huge short positions held by the funds, the rebound could be significant. That being said, the U.S. is still expected to produce a record corn crop. The continuing strength of the U.S. dollar will have a long term negative impact on commodities in general. And there is still a lot of wheat in farmer’s hands that will continue to hang over markets and mute any rally in the cash markets.

Pearson Burke watches the grain markets for the Odessa Union Warehouse.