Bullish Opportunity for Kansas City Wheat

This article, along with trading strategies, appeared in the July 28th issue of our Weekly Market Letter. Take a free trial today. 

December Kansas City Wheat has seen a $1.34 ¼ cent rally on the heels of a nearly $3.00 rally in Minneapolis Spring Wheat over the same period. While the fundamental story in Kansas City Hard Red Winter Wheat is not nearly as exciting as it is for the Minneapolis Hard Red Spring contract, the overall wheat story is a little brighter than it has been the past couple of years.

Total US wheat ending stocks are not as bearish this year as they were last year. At 938 million bushels, they are down 246 million bushels from last year’s 1.184 billion. That number should come down further in the August USDA supply demand report with the expected reduction in spring wheat yield. Harvested spring wheat acreage could be lowered in the August report, but most likely that will occur in September and in the subsequent reports. Hard red winter wheat ending stocks are estimated at 448 million bushels, down from 593 million last year.

The weakness in the US dollar is pulling global wheat prices higher relative to US wheat. US wheat came within $1.00 to $2.00 per tonne of competing in the recent Algeria business. Egypt bought 420,000 tonnes of Mostly Russian wheat this week at $219.11 per tonne C&F, and Algeria bought 500,000 tonnes of French wheat at an average price of $215.00. This compares to the May 31st tender that was done at $202.61. The stronger euro may prove to be a headwind for wheat exports from France, where their crop has rebounded from last year’s poor harvest. If the US dollar continues to slide, US wheat will become competitive.

Our chart analysis in Kansas City December Wheat has the market approaching some solid support levels on the recent $1.34 ½ decline. The 200-day moving average at $4.93 ½ and the 100-day moving average at $4.96 ¾ coincide nicely with a long term trend line that comes in at $4.93 ¼. The low tick this past week was $4.99 ¼, and the market has stabilized since. The slow stochastics have crossed over positive, indicating a shift in momentum. Volume was below average over the last four days when the market was making a low. This could also indicate waning downside momentum.

The recent Commitments of Traders report showed managed money traders net long 70,918 contracts as of July 18th. We look for that number to come down to 50,000 contracts over the next two reports, as long liquidation was prevalent during the recent sell-off. We feel a rally back up to the $5.50 ½ to $5.62 ¾ area is possible over the next few weeks.

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-Matt Connelly


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