- While SRW wheat fundamentals remain bearish, this hasn't stopped funds from continuing to cover short futures position and possibly have gone net-long.
- It's possible the investment side of the market is looking at the long-term trend of SRW wheat's intrinsic value that turned up earlier this month.
- I still see the market as susceptible to snapping back to its fundamental base, the unknowns being when and from what price.
You might recall I’ve talked a great deal about how bearish winter wheat markets are, particularly the Chicago (SRW) variety. While my opinion hasn’t change, continued rally in the National SRW Wheat Index (national average cash price) has reached almost $1.65 since its March low, prompting many to question my sanity (more so than usual). This week, a friend from Kansas sent me a simple message asking, “How much higher is this ‘Bear’ wheat market going to go?” Honestly, I have no idea. What I do know is, according to Newton’s First Law of Motion[i] applied to markets, the trend of the market will continue until the noncommercial side changes its mind. In the meantime, we do have ways of looking at the wheat market beyond the mirage of headlines and imaginary government numbers.
Since I’ve already mentioned Newton’s First Law of Motion, let’s tie it into the idea of a Rubber Band Disposition. While both winter wheat markets are showing signs of being stretched in opposite directions, the more dramatic is SRW wheat. Our two key fundamental reads remain incredibly bearish. National average basis was calculated last Friday at 59.75 cents under July Chicago futures, on par with the previous 5-year low weekly close for last week. At the same time, last Friday saw the July-September futures spread cover 110% calculated full commercial before the CME’s higher Variable Storage Rate kicked in over the weekend. At Wednesday’s close the same spread covered 75%, with 67% or considered bearish. Also last Friday, the latest CFTC Commitments of Traders report (legacy, futures only) showed noncommercial traders decreasing their net-short futures position by 12,370 contracts, with this Friday’s update expected to show funds moving to a net-long futures position for the first time since the week of October 4, 2022. To summarize: Fundamentals are getting more bearish while funds get more bullish[ii]. This is what creates a classic Rubber Band Disposition, and like a stretched rubber band, the market will eventually snap back to its base, usually meaning funds move to get back in line with fundamentals[iii].
Is there a fundamental question regarding global wheat? Most of the chatter has been about weather problems in the Black Sea region of the world. This seems to be what has the attention of the investment side of the market, though it seems Watson[iv] has forgotten the Wheat Reality: One bushel of wheat left over is too many. Why? Because wheat can be grown in every corner of the world[v], with the old adage being harvest is happening somewhere nearly every day. Is the world running out of wheat? Not according to reads on real fundamentals (see above).
From a technical point of view, the July Chicago (ZWN24) daily chart is littered with failed short-term bearish reversal patterns. This tends to happen for a number of reasons, with the bottom-line being Watson doesn’t pay much attention to short-term technical patterns. To this I usually apply the Goldilocks Principle[vi], though I’m also questioning whether Watson is interested in weekly charts either. If commodities are now viewed as long-term investment opportunities, an evolution we have seen over the past 20 years or so, then it could be argued funds are looking more at long-term monthly (and beyond) trends. The aforementioned National SRW Wheat Index (IWY00) posted a new 4-month high on May 6, confirming the intrinsic value of the SRW market has moved to a long-term uptrend. Does the market have a fundamental reason to pull investment money in? For now, my answer is still no, but we’ll see if things change over the coming months.
What about day-to-day activity in wheat, though? We’ve grown accustomed to seeing the market post strong double-digit rallies overnight, only to struggle as the day session unfolds. Occasionally we’ll get a day of big gains thrown into the mix, just to keep things interesting. The bulk of the commentator/analyst/reporter industry doesn’t spend much time talking about wheat, usually, so when the sub-sector moves into the spotlight they tend to make up reasons why every day. It’s here we have to remember it’s the what, not the why[vii] and look at what the market did. Also, it’s a good time to apply both the NBA Rule (Only watch the last half-hour) and the Wilhelmi Element (The only price that matters is the close). Doing this will help us eliminate some of the noise and confusion inherent when wheat gets wacky (Wacky Wheat anyone?).
I’m going to close with a story. A long time ago in a galaxy far, far away, I was the merchandiser for a central Kansas grain cooperative. I grew up on a wheat farm, had been around the crop my entire life, and had started my career spending most of my time analyzing what is also known as Poverty Grass. Yet it was wheat, in any of its forms (cash, futures, etc.) that would wake me up screaming at night.
It’s just the nature of the beast.
[i] A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial (fund) activity.
[ii] To this I usually say: The difference between Fundamentals and Funds is “a mental” thing.
[iii] Newsom’s Market Rule #6 tells us, “Fundamentals win in the end”.
[iv] My name for the computer algorithm trading industry in general.
[v] A recent story in Grain World talked about how Saudi Arabia’s wheat production was expected to increase 25% during 2024-2025 for a total of 1.5 million tonnes. Saudi Arabia is a desert.
[vi] Daily charts are too hot, monthly charts are too cold, but weekly charts are just right.
[vii] Newsom’s Market Rule #6
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On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.