AM Markets: Is Wheat Chart Pointing The Way To Price Gains?

(Agrimoney) –  For chart-watchers, wheat futures are displaying something of a “buy” signal.

That is, the chart of the last four months appears to be showing what is termed a “double bottom”.

Having fallen sharply from a July low, the December contract in Chicago, the world’s bellwether market, hit a nadir on August 29 of $4.22 ½ a bushel.

While a subsequent bounce faded last month, this month’s decline has shown signs of running out of steam too, bottoming out at $4.23 ¾ a bushel on Monday – crucially, above the previous low.

“A double bottom is usually a bullish sign,” noted Tobin Gorey at Commonwealth Bank of Australia.

(And some chart watchers still see the graph on wheat prices going back to 2008 as upbeat too, still showing signs of a continued recovery from a low of $3.59 ½ a bushel in August 2016.)

Shares vs commodities

Not that this is the only technical investment story in town on wheat, with worries that funds are pulling money from grains, and indeed commodities in general, to ride the rising tide in share markets.

“Strong corporate earnings continue to favour investing in equities versus the raw commodity sector,” said Benson Quinn Commodities.

This trend “has money exiting stale positions that have little growth potential, [in preference] for those that do”.

But open interest data provide some support to grain markets, in showing that there is more than short-covering, and fund exits, behind this week’s price rises.

Open interest (ie the number of live contracts) in Chicago wheat futures rose 1,301 contracts on Tuesday, and is now up nearly 36,000 contracts over the past week.

‘Competitiveness at risk’

There do look limits to how far wheat futures could rise for now, with Mr Gorey noting that “the US still needs to sell a lot of wheat.

“And the US dollar is not helping,” by recovering, so cutting the competitiveness of US exports at a time when Russia especially has stacks of wheat to sell, and at attractive prices.

(In fact, Agritel said that “current wheat price levels are staying below production costs for many countries, except for the ones in the Black Sea area, that are benefiting from a structural advantage in terms of competitiveness”.)

Mr Gorey said that “in our view, another hefty rise [in wheat prices] would simply put US competitiveness at risk”.

The dollar was in fact marginally lower in early deals against a basket of currencies, shying away for now from a confrontation with its looming 100-day moving average.

That helped wheat futures for December add 0.3% to $4.39 ½ a bushel as of 10:25 UK time (04:25 Chicago time), looking for what would be a third successive winning session, for the first time since early September.

‘As soon as the managed money boys are done…’

How much of the upbeat analysis on wheat applies to corn?

Well, open interest in corn is certainly on the rise, adding more than 58,000 contracts over the last week, and the largest since April 2011 according to Halo Commodity Company.

However, there is not clear double bottom on the corn chart.

According to Benson Quinn Commodities, “corn really has no story other than it’s been down for a while and the lows held.

However, “as soon as the managed money boys are done on the buy side, no one else appears lined up to push this higher”, the broker said.

Corn futures for December added 0.1% to $3.53 ¼ a bushel, taking its discount to wheat a little higher.

That said, the discount remains well below the level of $1.08 ½ a bushel reached late last month, and the $1.86 a bushel in July, offering potential for further wheat price outperformance.

‘Expecting a wetter pattern’

Soybean futures, meanwhile, which have been undermined of late by the closing of long soy-short grain bets, managed the best headway of all this time, adding 0.6% to $9.81 ¾ a bushel.

This even as January futures on the Dalian exchange in China, the top soy importing country, eased again, by 0.2% to 3,661 yuan a tonne, a fresh contract closing low.

Furthermore, “cash movement of soybeans in Brazil has been rather high the last couple of days as the Brazilian real has depreciated significantly against the dollar,” said CHS Hedging noting that “currently, the real is trading near its mid-July low”.

Also in Brazil, “weather forecasters are expecting a wetter pattern to emerge in dry soybean regions”, CBA’s Tobin Gorey said.

“The forecasts need to be realised in soil moisture gains but that is looking more likely.”

Rising oils

Still, on the more positive side for values, optimism remains over US prices of vegetable oils, such as soyoil, after the Environmental Protection Agency ditched plans for diluting biofuels mandates, and with further movement expected in the story of US clampdowns on imports of Argentine and Indonesian biodiesel.

Chicago soyoil for December added 0.7% to 34.58 cents a pound, earlier touching a one-month high of 34.69 cents a pound.

In Kuala Lumpur, palm oil for January added 0.9% to 2,802 ringgit a tonne.

This despite data from cargo surveyor ITS showing a slowdown in growth in Malaysian palm oil exports, to 8.6% month on month as of today, from a rate of 11.6% as of October 20.