What happens on the cereal markets? Look at the wheat prices. They took off from $5.65 a bushel in April 2007 to a high of $14.06 in late February 2008. It’s almost a 150% rise in less than one year.
However prices have been falling back for roughly 6 months, and the closing price last Friday has been posted at $7.51. A good overview of the fundamentals of this volatile market is essential before analysing the technical aspects.
First, the global demand, because of the world population growth, is easily predictable. Those past few years, it has moved between 615 and 625 million tonnes per year.
On the offer side, 20% of the world production is put on the market when 80% is domestically consumed. The main producers and exporters are the US, Canada, Australia, the EU, the ex-USSR area and Argentina.
Like on the corn market that we studied recently (Money Morning of August 20), the two main drivers of the offer side are the plantations and the weather conditions.
Last year, many farmers in the US changed wheat plants to corn (at this time producing corn was more profitable thanks to the bio-fuels rising demand) and the weather conditions were really terrible worldwide (drought in Australia, heavy rains in Europe and Russia, cold wave in the US and Canada). The correlation between weather and prices on the wheat market is really strong.
As a result the global stocks decreased massively during the past year. The current level of inventories is the lowest in the last 60 years in the US, the lowest in the last 30 years globally!!
However, the recent decline of the wheat prices (-16.8% since August 21) is now explained by current economic circumstances. First the rise of the US Dollar is a brake for the non-US importers. As the wheat is sold in US Dollars, a stronger Greenback leads to higher prices for the rest of the world.
The other reason is that several exporting countries have just eased restrictions that they had decided a few months ago when the food inflation and alimentary crisis was peaking!
Of course, last but not least, the speculation on this volatile market (therefore where there are a lot of opportunities to make money) is a key factor that strengthens the trends in place.
What to expect now? Two contrarian forces are in place. On one hand the momentum and oscillator indicators are bearish. Both the MACD and the CCI (Commodity Channel Index) have triggered negative signals in late August. There are no oversold conditions therefore a further move on the downside might be possible.
On the other hand, the price action reached last Friday an important area of support. It corresponds to both the medium-term support line (that goes through points C, D and now E) and a long-term support line that has been a previous resistance in 2003 and 2004. This level of $7.50 has indeed been a previous high; it could be now the new low.
That’s why a short-term rebound is expected during the next few sessions. A retracement of half of the recent decline (therefore towards a target of $8.25) is likely.