The Chicago Board of Trade soft red wheat contract has declined by nearly one third since the early May high near $7.50 per bushel in the current September contract. The mild summer has brought with it the classic seasonal May-July sell-off. We believe that this market may be ripe for a bounce based on demographic, seasonal and technical factors.
Global appetites continue to grow. Growing population bases frequently transform farmland into domestic or industrial land. Both of these factors take acreage off the table in the face of growing populations that are steadily aspiring to better diets. Neither of these trends will slow any time soon. We began to discuss this nearly ten years ago. Our point is that while the growing seasons will remain the same and more acreage will be brought online to exploit profit potential, each year’s seasonality will return the market to a slightly higher base price at which they’ll begin next year’s cycle all over again. While this hasn’t held true exactly, we can see that the floor prices for each wheat season is slightly higher than at some point in the past.
Beginning in 2000, wheat based around $2.50 and eventually penetrated $4 in late summer of 2002. The following spring, wheat based around $2.85 before once again climbing above $4 by late summer. Two thousand and six saw wheat’s early base form above $3 per bushel before rallying above $5 for the first time in more than 10 years. Two thousand and seven saw a spring base that stayed above $4 before the markets went parabolic and finally traded above $13 per bushel. Following the blow-off, we saw bases above $4.50 in 2009 and $4.40 in 2010. Recently, we’ve seen several late summer seasonal rallies start from prices above our current levels including above $6 in 2011, $6.40 in 2012 and $5.60 last year.
The seasonal pattern over these years has remained consistent with an April – May base followed by a June – early July sell-off then, followed by a rally into the September contract’s expiration. Therefore, while the market is subject to wild gyrations due to weather extremes, we can clearly show that the impact of the world’s growing appetite for a higher quality diet in the macro outlook that wheat prices are building generally higher base prices. Each of these historical bases has been fully supported by strong commercial buying during the late spring decline. This year’s situation is very similar in that I believe the current sell-off will end up setting the base price from which we’re about to rally.
The commercial traders have done a pretty good job of bracketing the wheat trade. They reached their highest net short total position on May 9th, the same week the market turned south. Recently, they’ve been on the buy side in a big way. They’ve been buyers in each of the last nine straight weeks with net purchases totaling nearly 80,000 contracts. Just as important as their recent purchases is their historical purchasing power. Their current net long position total is just under 50,000 contracts. Last year their position at this point was near 75,000 contracts. Recent seasonal base levels show starting points of 85,000 in 2012, 56,000 in 2011 and 75,000 again in 2010. You can see the effects of the commercial traders’ actions on the historical wheat chart below. (Click to enlarge.)
There is good reason to believe that the typical seasonality will still play out in a summer rally in spite of the steep decline over the last 10 weeks. In fact, a portion of this decline must be attributed to the hoarding mentality that spooked the market during this spring’s unrest in Ukraine. We discussed the wheat market’s 15% rise throughout the month of March both on our own site in, “Trading Ukraine Uncertainty” as well as in material we wrote for other publications. Ultimately, the commercial selling during that rally contributed significantly to flushing out the buy side speculators trying to capture the fear premium that Putin pumped into the market. Therefore, barring the added volatility, it appears that the internals of the wheat futures market are setting up for another trading opportunity as we finish the month of July.
