New Lows in Wheat

July 29th, 2009 Posted in Uncategorized

Indicative of lethargic demand and a lack of significant trouble for the Northern Hemisphere wheat crop development/harvest, Chicago and KC wheat futures broke into fresh new swing lows today. For the WU9, this marks an approximate 28% decrease in the price of a bushel of wheat since the end of May. This is significant. This is opportunity & risk. A lot of this move happened in just 20 or so trading days during the month of June.

Concurrently, we've seen both new-crop Corn and Soybeans fall from their highs. This "should" be supportive for the beef and pork industry, as the costs of inputs with respect to fattening up non-grass fed cattle, and hogs, has decreased notably. However, while the cattle market has reflected realtive stability, the lean hog futures have plummeted. 

Relative to a stream of Cattle on Feed reports and the more recent Cattle Inventory report, the expectations for cattle supply in Q4'09 is that of a tightening scenario that should be price supportive. Hogs, on the other hand, are more than ample. The most recent quarterly hogs and pigs report painted a picture of greater-than-expected supplies based on average pigs/litter & farrowing intentions. This, along with the influence of non-"swine-flu" on the psyches of some of our trading partners, has recently really broken the backs of any bulls. Check out the chart of LHZ9 (click to enlarge):

The LHV9 chart has an 86% correlation to two years in the past, 1970 & 2002. IF the price pattern repeats itself, the expectation is for a move down to 45 cents. IF the LHZ reacts similarly to the price patterns of 1970 & 2002 for that particular delivery month, then, in my estimation, it should continue with this weakness until early/mid August. We  shall see.

Bob