Grain Spreads: Short Covering Driving Wheat Push
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Commentary
Wheat closed slightly higher, after giving up a portion of the early session gains. Funds continue to lighten up their short position with follow thru buying showing up early this morning going into the morning break and continued into the day session putting in the high’s midday with a round of profit taking seen going into the close but did close the session positive. This is the third day of higher closes and for KC and CME, 6 out of the last 7 days after making new contract lows, The market has certainly changed its tune following the new contract lows seen early last week and the question is what is different now? First, in my opinion last week's technical key reversal higher prompted initial fund short covering and this is the 6th session in a row on July Chicago wheat with higher daily lows and higher highs. Second, global weather concerns have moved to the forefront this week with hot temperatures in China's growing areas and additional heavy rains expected in SRW areas of Missouri, southern Illinois, southern Indiana, and Kentucky where disease concerns are mounting. Although Sov Econ raised their Russian wheat production estimate to 81.0 million tonnes, up from 79.8, they also commented that soil moisture remains a concern, especially in the Rostov region and the crop could still go backwards without additional precipitation. It's important to note that last year's production was 82.6 million metric tons, as a reminder anything under 80 million metric tons does see another shift in export flows, and with the agriculture emergency declared in the Rostov region due to frost/drought which was also seen last year that reduced wheat yields 38%, Voronezh and Belgorod regions have made similar declarations earlier, cash markets and spreads will be what we are looking closely at for price direction. Funds still have a sizable, short in both Chicago and KC wheat contracts in the amount of approximately 170K short. In my view there is still more room to the upside for both contracts in my opinion given the sizable, short. However, both are approaching major resistances above 5.60 in the most actively traded July contracts. This bull needs to be fed consistently into winter wheat harvest or a return to last week's lows maybe forthcoming without continued bullish inflows. Trade ideas presented in tomorrow's webinar.
Trade Ideas
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Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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