Newsom on the Market

By Darin Newsom
DTN Senior Analyst

There is a rule in the DTN newsroom that a piece has a clear "so what": What's the value to the reader for investing precious time in reading it?

To discuss wheat numbers from the January USDA reports released Tuesday, having a "so what" is easy: There is so much wheat in the world that wheat market(s) could have a hard time not beating crude oil in a downhill race to $0 in 2016.

In its January round of reports released this past Tuesday, USDA pegged 2015-2016 domestic ending stocks at 941 million bushels, up from December's estimate of 911 mb. If realized at the end of May 2016 (and registered in the June 30 Quarterly Stocks report), this would also be the fourth largest domestic ending stocks figure dating back to the 1988-1989 marketing year.

The January World Agricultural Supply and Demand Estimates (WASDE), also released this past Tuesday, estimated world ending stocks at 232 million metric tons. This was also an increase from December's 229.9 mmt, and a larger record large figure if it comes to pass again at the end of May 2016.

U.S. production bumped up slightly in 2015 (from 2014's 2.026 bb) to an estimated 2.052 bb (735.39 mmt). While this remains well-below record levels of past decades, it became part of a global production picture that, when all the players are added together, comes to a record large 735.18 mmt. Total supplies came to a whopping 948.18 mmt (also record large), with the year-to year gain of 28.24 mmt more than triple the 8.99 mmt year-to-year increase in global demand.

Remember that "so what?" Repeat after me, "There is so much wheat in the world ..."

DTN Market Analyst Todd Hultman's latest Todd's Take column "All In" discussed the massive noncommercial (large global investment traders I've named Watson, after the IBM computer due to the influence of algorithm trade) net-short futures position. This means Watson has sold more futures contracts than bought, with the most recent (as of this writing) weekly CFTC Commitments of Traders report showing a net-short futures position of 88,670 contracts. This, too, is the largest net-short futures position Watson has ever held. In other words Watson is more bearish than ever, at a time when there is estimated to be more wheat worldwide than has been seen since the dawn of time (or at least back to the late 1960s). The wheat market equation adds up, right?

Again, repeat "There is so much wheat in the world ..."

Those of you familiar with my work know I'm partial to technical analysis, or the study of charts rather than the mind-numbing work of analyzing each and every supply-and-demand component. And in the world of charts, at least to me, major (long-term) trends (price direction over time) on monthly charts are more important than secondary (intermediate-term) trends on weekly charts, which themselves carry more weight than minor (short-term) trends on daily charts.

Usually when I put together outlooks, like my annual presentation at the DTN/The Progressive Farmer Ag Summit this past December, I use long-term trends. In the case of wheat, particularly the more heavily traded Chicago (SRW) market, the major trend of the futures market is sideways-to-down. The more active contract posted a low of $4.66 1/4 back in September 2014 and has been fighting to stay above this level since. This month has already seen the March contract post a new low of $4.56. If, by some miracle, March Chicago wheat can climb above last month's high of $4.99 (this month's high so far is $4.84 1/4) and close higher for the month (the December close was $4.70), it would establish a key bullish reversal on the long-term monthly chart.

A thing to remember is wheat markets (cash, futures) like to post false technical signals.

Also recall something I refer to often in my analysis: Newton's First Law of Motion applied to markets. Restated this says: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually be noncommercial (Watson) activity. I've already mentioned that Watson spent much of the second half of 2015 selling wheat futures. Correspondingly, wheat futures could not muster much of a rally, or sustain short-term attempts at moving higher.

But as Todd talked about in his column, the sheer size of Watson's net-short futures position, combined with the market trading at its lowest price level since the first-half of 2010, could lead to a round of short-covering. In other words, despite continued bearish WASDE numbers (world ending stocks outweigh domestic ending stocks when it comes to wheat, Watson could look to buy back some of its short futures.

This may be the best chance for the market to rally. If it doesn't it's because, say it with me now, "There is so much wheat ..."

From a technical perspective, if Chicago wheat can't stay above previously mentioned price support, the next stop could be a test of the October 2009 low of $4.39 1/4. (Yes, I see the market hit $4.25 1/2 in June 2010 before spiking to a close of $4.80 1/4. Keep in mind what I said before about wheat and false technical signals.) Beyond that we start to talk about real pain with support maybe at the February 2005 low of $2.87.

Whether or not the most recent WASDE numbers are correct is irrelevant. Watson believes there is ample wheat worldwide and continues to sell. Yes, things could change. But for now the simple equation is: Larger world ending stocks equals larger noncommercial net-short futures position. It adds up.

P.S. For those of you who are as intrigued by numbers as I am, today's date makes an interesting equation: 1 (January) + 15 (the 15th) = 16 (the abbreviation of 2016). So today adds up, just like the wheat situation.

Darin Newsom can be reached at darin.newsom@dtn.com

(ES/GH)

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