Wheat: Overspent at the Top or More to Go?

Questions about Vladimir Putin’s control over Russia — as well as Moscow’s insistence on closing its grain corridor with Ukraine — sent ​​wheat to four-month highs last week, positioning it for its best monthly performance in eight years.

With such an upside, the question naturally for anyone already into wheat, considering a position there, or wondering when to exit is: Has this market peaked or does it have more dry powder left?

Wheat’s fundamentals based on global production suggest a still-tight market meaning potential for more upside.

But the grain’s technical outlook, driven by charts of the front-month futures contract on the Chicago Board of Trade, or CBOT, suggests consolidation in the near term.

CBOT Wheat Daily

Ahead of Tuesday’s regular session on the CBOT, the front month was at $7.2550 per bushel. On Friday, it got to $7.7012, its highest since the peak of $7.7325 on Feb. 17.

For all of June, front-month wheat on the CBOT is up nearly 23%, its most since a 29% jump in June 2015.

Aside from crop and chart influence, wheat could also be taking cues from the dollar, which could rise ahead of inflation data due toward the end of the week. The Dollar Index, which pits the greenback against six competing majors, was under 102.27 at the time of writing, versus the June high of 104.435.

Inflation higher than desired by U.S. to European authorities suggests that economies on both sides of the Atlantic are chugging along just fine to keep safe-haven demand alive for gold.

But with central banks from the Fed to the BoE and ECB eyeing more rate hikes, the dollar, and U.S. Treasury yields could see fresh spikes at the mid-year point, weighing on the yellow metal.

Investors will get a fresh update on the possible future path of interest rates on Friday with the release of May data on the personal consumption expenditures price index, the Federal Reserve’s preferred inflation gauge.

In the 12 months through April, the PCE price index, as well as the core rate, were still running well above the Fed’s 2% target.

The inflation numbers will feed into investor expectations around the Fed’s next rate decision in July after the central bank paused tightening at its June meeting but signaled more hikes ahead. Prior to that, the latest consumer confidence report is due out Tuesday after the index hit a six-month low in May. June's index is expected to tick higher.

The eurozone is to release preliminary inflation data for June on Friday. And while the headline rate of inflation is expected to moderate, underlying inflation is expected to tick higher, underlining the challenge facing the ECB.

Traders are now betting on a July hike by the ECB and expect another move by October that would bring rates to 4%.

Wheat’s Fundamentals

Ideas that adverse crop weather could cut into production around the globe sent U.S. corn, soybean, and wheat futures to multi-month highs since The sentiment gained legs after the U.S. Department of Agriculture late Tuesday cut its good-to-excellent ratings for U.S. corn and soybeans by more than expected, including steep drops in top-producing states Iowa and Illinois.

Wheat production for 2023/24 in many countries is at risk from drought. The Gro Drought Index, aggregated for all the world’s wheat-growing regions using Gro’s Climate Risk Navigator (ELI:NVGR) for Agriculture, is at its second-highest level in at least two decades. Gro models and analytics are projecting weaker year-over-year harvests from Canada, India, Ukraine, Australia, Argentina, the U.S., the EU, and China.

The poor wheat production outlook comes as global wheat ending stocks, excluding China, are close to the tightest levels in more than a decade.

In addition, Russia’s spring wheat crop, which represents 25% of the country’s total production, is also contending with dry conditions. Accumulated rainfall in spring wheat regions is close to a 20-year low, as seen in this Navigator display, while the Gro Drought Index has advanced since early May and now shows “severe” drought conditions.

Russia harvests its winter wheat crop in July and its spring wheat crop beginning in August.

This weekend’s rebellion against the Russian government by the Wagner paramilitary group sparked volatility in global wheat markets Monday, as CBOT futures prices jumped in intraday trading by more than 3% to a four-month high before settling back.

“At this point there’s more questions than answers” to the situation in Russia. Phil Flynnn, analyst at Chicago broker Price Futures Group, said, referring to Saturday’s armed rebellion against the Kremlin by Yevgeny Prigozhin, the head of private military company Wagner. Russian Prosecutor General's Office said Prigozhin is liable for criminal charges

The instability in the region, coupled with ongoing worries about wheat production around the world, has speculative traders covering short positions. There are also growing concerns that renewing the Black Sea Grain Initiative could be more difficult than in the past when it expires on July 18. The initiative, last renewed in May, provides a safe transit corridor for agricultural commodities from war-torn Ukraine, as Gro highlighted here.

Russia is the world’s No. 1 wheat exporter and was expected to ship a record 46.5 million tonnes of wheat in 2023/24. Production prospects for Russian winter wheat crops, which make up the bulk of the country’s wheat production, have been very favorable, as shown by Gro's Russia Winter Wheat Yield Forecast Model.

Many countries in the Middle East and North Africa rely heavily on wheat exports from Russia. Egypt, for example, normally gets 60% of its wheat imports from Russia. Any hindrance to Russia’s exports could alter world trade flows at a time when production is threatened worldwide.

Wheat’s Technicals

With the current charge in CBOT wheat, bulls aim to reach the 100 Week Simple Moving Average, or SMA, of $8.15, followed by the Monthly Middle Bollinger Band target of $8.20 in the near future, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

CBOT Wheat Weekly

But he adds that the short-term outlook is mixed.

“There’s sideways volatility from the Daily Stochastics negativity. There’s also the overbought RSI, or Relative Strength Index, with calls for a consolidation towards the 100-Day SMA of $6.77, followed by the 50-day EMA of $6.62. This downside risk is alive as long as prices sustain below the 200-Day SMA of $7.41.”

CBOT Wheat Monthly

Bottomline:

So there we have it: a possibility for a run towards $8.20 — nearly $1 more than current levels.

But there could also be weaker action taking prices to beneath $6.70 — or more than 50 cents lower than where the market now is.

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.