Prepared by Friedberg Commodity Management, Inc.
The Commodity That Cried Wolf
(E-mailed to subscribers on January 16) Wheat prices have approached the $3 per bushel level frequently during the past year or so. They have also fallen each time they have done so--in most cases to fresh contract lows (Chart 1). Prices have broken upwards, yet again. Even analysts who acknowledge the existence of bullish fundamentals do not expect a sustained rally. After all, the global supply/demand balance has been tightening for three years now, and prices have done little. Why should this rally be any different?
Chart 1: Spot Wheat
This particular rally began on the last trading day of 2000. Trading conditions were thin, as participants began to celebrate New Year's a bit early. Shortly before the close of the abbreviated session, March wheat exploded to the upside, finishing with a gain of 7-3/4¢ per bushel, the largest single-day gain in months. There were no known, fresh fundamental developments to account for the move. The wire services offered up their typical responses in the absence of any hard news: "fund buying" and "stops were triggered." One would have expected the rally to fade shortly after traders got back from holidays. Interestingly, though, two weeks have passed, and the market has not only held the rally but has actually built on it.
Skeptics are not without cause. Although U.S. exports have been rather dull lately, the USDA has persisted with optimistic forecasts in its monthly reports. In this past Friday's January Supply/Demand Situation report the USDA maintained its estimate for annual exports at 1.125 billion bushels. This would represent a 3.2% increase over last year's exports. The USDA makes this forecast despite the fact that shipments are running 2.9% behind last year's pace. Export commitments are 3.2% slower than last year at this juncture of the season. If the recent trend is any indicator, the situation is not improving. Commitments for the last three weekly reporting periods were below 400,000 tonnes, far short of the kind of numbers that would be required to meet the USDA's projections for the year. Commitments thus far stand at 62% of the USDA's final estimate for the season, a sharp contrast to the average from 1985 through last season of 75%. U.S. farmers will have to sell a lot of wheat from now until June 1 to vindicate the USDA.
The lethargic export business cannot be blamed on a slow holiday season. Average weekly export commitments this past December were 443,000 tonnes compared with December 1999 when the weekly average totaled 590,000 tonnes.
One of the bulls' favorite excuses for this market remaining so weak in the face what seemed to be such bullish fundamentals was the strength of the U.S. Dollar. "The pent-up demand would emerge as soon as purchasing power was restored," went the argument. With the dollar having plummeted by 8.5% these past few months, the bears can and do ask: "Where is the pent-up demand?"
The most likely explanation is that the USDA will adjust its annual export tally eventually to reflect the current pace of sales. It hasn't done so yet, because it also incorporates historical trendlines into its calculations. On the other hand the analysts at the USDA may know something we don't. A possible scenario is that the USDA is betting that once China's participation in WTO gets going, the Chinese will easily compensate for the lackluster sales we've seen this season.
As has been the case throughout the building of this base in prices, the supply-side issues continue to favor the upside. This trend continued with Friday's USDA report. At 41.3 million acres, U.S. farmers will have planted the smallest winter wheat crop since 1971. This compares with last year's 43.3 million acres. The street expected a low number, but it certainly was a surprise, because it came in below the low end of analysts' estimates of 41.5 million acres.
Australia, which meets some of the import needs of Asian importers, suffered a serious setback this season, producing only 19.5 million tonnes compared with 25 million tonnes last year. While this has been known for some time--the USDA did not change December's figure--not much mention is made of the fact that a very wet harvest season turned a significant amount of the crop into feed grade from what normally would have been milling grade wheat, which will eventually bringing customers of higher quality wheat to the U.S.
Another little surprise contained in the report was the quarterly stocks total. While corn and soybeans came in higher than expected, wheat defied what might have been expected, given the slow export season we've seen. All wheat stocks stood at 1.801 billion bushels on December 1 compared with the average trade guesstimate of 1.818 billion bushels and 1.883 billion bushels in 1999.
In conclusion, the pathetic pace of U.S. exports is undeniably an issue important enough to cause doubt as to whether this market can really go anywhere. But with a third year of shrinking global production under our belts and another one likely, this market is at the very least in a vulnerable position. If U.S. exports do pick up, the ensuing shortages will catch the market sleeping. Then, look out!
Strategy
Remain sidelined but watch the export market and stay tuned.
Current Positions
As Of...
December 21--Long March cocoa (750 stop close).
January 11--Long March copper (80.35 stop close).
Liquidations
January 2--Liquidated long February gold.
January 9--Covered short March copper.
January 11--Liquidated long March soymeal.