Market Perspective

Wheat markets have enjoyed a little bit of a bounce over the last 10 days. Cash markets are about $.20 off their lows and future markets are about $.30 off their lows. Part of it has been a correction from oversold technical conditions, part of it has been a stabilization of world wheat prices, but most of this correction has been due to the weakening of the U.S. dollar. The dollar has had an impressive rally since July and that in turn pressured commodities in general and wheat in particular. Last week Chicago wheat futures gained every day, while the U.S. dollar retreated every day. That was no coincidence.

Over the long term, the greatest driver of grain prices is the relative strength or weakness of the U.S. dollar. Supply and demand fundamentals definitely play a role in determining the price of any commodity, but if you look at the historical data, a weak dollar pushes commodity prices higher and a stronger dollar drives prices lower, especially the futures markets. This is because large investors use the futures contracts as a hedge against the dollar, sometimes regardless of what the fundamentals of the actual commodity are.

While the perception in the U.S. is that the economy is struggling, that is not the view of the rest of the world. The U.S. economy has seen steady growth over the last five years. Unemployment is under six percent. Corporate profits are at historically high levels, and the U.S. equity markets have recently reached new all-time highs. As a result, the Federal Reserve has stated its intentions of raising interest rates. Higher interest rates make the dollar more attractive to investors and commodities less attractive. But the tide might be turning.

The economies of Europe and China are showing signs of slowing. The unrest in the Arab world has made national security once again a priority for this country. That means more defense spending and probably greater budget deficits moving forward. Combine these with the recent five percent pullback in the stock market and now the Fed is likely to postpone raising interest rates and the dollar is no longer as attractive. If investors are wary of equities and the dollar, then they will shift a percentage of their money into commodities. So far this trend is small but it does bear watching.

Now let’s get back to fundamentals. The latest USDA Crop Production Report came at last Friday and, while it showed record corn and soybean production, the numbers were not as large as expected. Corn production came in at 14.5 billion bu and soybean production at 3.9 billion bu. Carryovers for next year were estimated at 2.08 billion bu for corn, 450 million bu for soybeans and 654 million bu for wheat. That was a 44 million bu reduction for wheat carryovers vs. last month’s projections because of a 25 million bu increase for both exports and feed usage. Carryovers for soft white wheat were reduced 15 million bu and now are projected to be only 37 million bu for next year. That is only a 15 percent stocks-to-use ratio. That is tight.

Remember when I said that the relative value of the dollar is the best long indicator of price for a commodity. Every once in while supply and demand fundamentals will become the dominant factor. We have seen that in the club wheat market this year and also the dark northern spring wheat market. We could very well see that in the soft white market later this year, especially if the crop out in the field doesn’t get some rain soon.