Technically Speaking
Darin Newsom DTN Senior Analyst

Sunday 05/04/14

Star Wars Day and July KC Wheat

Those of you who grew up in the 70's remember the cultural event that was the release of "Star Wars". Though it turned out to be Episode Four, with the first three (released decades later) introducing us to the regrettable character of Jar Jar Binks, the original movie will always be remembered for its iconic manta, "May the force be with you." So much so that middle-aged people with too much time on their hands and too few new good movies to latch on to have made May the Fourth officially "Star Wars Day" (May the Fourth be with you, get it?). Those of you not interested can consider it a warm-up to the food, drink, and festivities associated with the following day, Cinco de Mayo.

Source: DTN ProphetX

In recognition of Star Wars Day though, it seems fitting to take a look at the July Kansas City wheat contracts. What possible connection do the two have, you may ask? It's simple, not only is the HRW market now a "force" to be reckoned with, but it is so because of the harsh desert like conditions across much of the U.S. Southern Plains. These conditions bring to mind the movie's hero's home of Tatooine (An interesting fact: I was correct on the spelling of this, though Microsoft Word's spell-check disagreed), a desert planet known for unrelenting heat generated by its twin suns.

I'm sure you've seen the pictures by now of the blowing dirt across Kansas (the heart of the HRW wheat growing area), nearly burying cars stranded in roadside ditches just outside of Great Bend, Kansas. Or of countless dust storms that bring to mind the worst days of the Dirty Thirty's across this same area. It is these conditions that have provided the spark to the new-crop July Kansas City wheat contract, allowing it to easily clear its previous high of $7.77 3/4 to set its sights on the contract high of $8.67.

Let's talk market structure of HRW wheat. Uptrends are usually generated by renewed noncommercial buying. But in this case, last Friday's CFTC Commitments of Traders report (positions as of Tuesday, April 29) showed this group actually reduction their net-long position by about 800 contracts (bottom study, blue histogram). Why would they do this? First, the July contract is sharply overbought with weekly stochastics approaching 90% (third study). Along with being overbought, the weekly close of $8.21 3/4 put the market in the upper 21% of its five-year price distribution range, not a welcoming invitation for new buying. And finally market volatility (not shown) has skyrocketed, finishing the week at about 23%.

So if it isn't noncommercial buying pushing the market higher, what is? The answer is simple enough: commercial interest. Notice the carry in the July to September futures spread (second study, green line) closed the week at only 1 3/4 cents. This is the narrowest this spread has been since mid-May 2013. Given the strength of the uptrend in the spread, it would not be surprising to see it move into an inverse in the near future, reflecting an increasing bullish market view of supply and demand as HRW crop prospects continue to dim.

As stated above, the upside target remains the contract high (July contract) of $8.67, a price in line with potential major resistance on the long-term monthly chart pegged at $8.63. This latter price marks the 67% retracement level of the previous major downtrend from the high of $9.90 1/2 (February 2011) through the low of $6.07 3/4 (January 2014).

If you are a Star Wars fan, and you do decide to watch all the movies today, just be sure to take a break once in a while. Maybe timing one at the 7pm (CST) open of the CME Globex session, just to see how much force the Kansas City July contract may have as we start a new week.

To track my thoughts on the markets throughout the day, follow me on Twitter:\DarinNewsom

Posted at 9:37AM CDT 05/04/14 by Darin Newsom
Comments (1)
Exuberance: sometimes rational, sometimes not, likes to find its way into the Minneapolis hard red spring wheat (HRSW) market. Its own tight stocks and/or tight stocks of the plains hard red winter wheat (HRWW) -HRSW can fill in as a substitute for HRWW - tends to move price of the Minneapolis wheat to a premium to the Kansas market of HRWW. The potentially tight 2014-15 HRWW ending stocks and a slow pace of planting of HRSW might see such a move the spring wheat. A WAG (wild ass guess) at the 2014-15 HRSW balance sheet implies something like a 30% reduction in production, from trend, would be needed to cause a "tight" position in HRSW. This level of production decline has only occurred once (2002) in the last 28 years. Some folks are already talking of more than a 20% decline in planted acres of HRSW because of the current planting pace and conditions of the northern states where this wheat is grown (ND, 5,900,000 planted acres, 52% of total; MT, 2,600,000, 23%; MN, 1,200,000 11%; SD, 1,100,000, 10%; WA 216,000, 2%; ID, 196,000, 2% and the balance in OR UT and CO). So the potential for a 30% production decline is more likely if the decline in planted area is realized (5 out of 28 years (18% of the time): 1988, 1997, 2002, 2006 and 2011). With "high prices", growers in the North will take on the risk of "late" planting. They have planted into June with the proper financial motivation (There is the 1 in 4 crop insurance rule that may come in play for some producers as well.) but the potential for a fall killing frost becomes a real factor. Another factor that could add exuberance to the HRSW market is the transportation issues with the high level of crude oil exports from the region dominating the rail capacity. (The oat market this winter indicated how transportation issues can be a price mover.) So the Minneapolis wheat market should find many things to keep the exuberance on and off, rational or irrational, through harvest and beyond of the 2014-15 HRSW crop. Freeport, IL
Posted by Freeport IL at 11:07AM CDT 05/05/14
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