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Technical Damage to Wheat

Published on Wednesday, February 20, 2019

Within the US grain discussion, typically wheat takes a backseat to corn and soybeans; however, as of late it has gained attention from both a fundamental and technical perspective.  On February 8th, the USDA announced wheat planted acres were down 1.2 million acres due to excessive precipitation and cool temperatures during the planting window.  This provided little support to a market that has continued to struggle with burdensome supplies globally and domestically.

In the global wheat market the US has struggled to gain exports over Russia, Romania, Ukraine and France.  Yesterday's poor wheat export inspections continue to confirm this trend. Cumulative year to date US wheat exports are at 15,747,362 tonnes, 10.4% below last year. Currently this puts wheat at 57.9% of the USDA's total wheat export expectations within the 2018-19 marketing year.  The 5 year average at this time is 67.7%.  See chart below.

Technical damage was done last week when March futures broke out on the bottom side of a channel that had held since the start of the year.  In the days that followed, wheat has continued to slide and violate successive support levels.  Adding insult to injury earlier in the trade Wednesday, we saw the March contract trade below the prior contract low of $4.8225 to establish a new lifetime contract low at 4.7575.  While we have managed to bounce off of these lows during the day's trading session, significant risk remains present.  See chart below.  

While you may not plant wheat on your farming operation, the ripple effect from this dramatic price decline could impact the corn market.  Throughout history (see below),  you notice a strong correlation between the price of wheat and that of corn.  Should wheat continue to decline and corn holds near current levels or moves higher, you may start to see wheat move into cattle rations in place of corn.

As we look at the path ahead, put options are still warranted with new crop July 4.90's trading around 26 cents.  With the recent technical damage and near record supplies, wheat appears positioned to struggle gaining significant upward momentum.  Contact us to sort through your situation and develop strategies accordingly.