The last time the world was in dire shortage of wheat—the commodity used for making staples from bread to pasta and cereal—prices of the grain got up to a high of less than $6 a bushel. Now, three years later, another global squeeze is threatening to send the wheat market to between $9 and $12, highs last seen in 2008.
Wheat is in short production across most of the northern hemisphere while demand, especially in the United States, is exploding as the No.1 global economy—with all its attendant woes, including soaring inflation—leads the world economic recovery from COVID-19.
All charts courtesy of skcharting.com
Fundamentals: It’s The Weather, Say Crop Watchers
Several factors are withholding traditional wheat producing patches from maximizing their output and none is more dominant than inclement weather, say veteran crop watchers.
“Dry weather in southern Russia as well as the northern US Great Plains and Canadian Prairies remains a supportive feature in the market although the weather has become old news,” Jack Scoville, chief crop analyst at Chicago’s Price Futures Group, wrote in a commentary. “Offer volumes are down from both Russia and Europe.”
Not all of those regions were having troubles with weather though, said Scoville.
He said Russian weather has been good for production in northern and western areas and was beginning to improve south of the country too and into Kazakhstan, in time for the next crop.
Likewise, Siberian spring wheat conditions have been good with Europe expecting top yields in some areas amid strong crop conditions in certain parts of eastern Europe and northern Russia, Scoville said.
Overall, the quality of the crop and harvest has been below par, he said, but that hasn’t stopped the trade from sending the market into one of its most powerful rallies in years.
“European quality is a problem due to too much rain in some areas and not enough in others. Speculators keep talking about inflation and are buying commodities for an inflation trade.”
He cited the rally, particularly in Minneapolis Spring Wheat, on the back of ideas that the United States will exhibit strong, consistent demand for the grain.
Technicals: How High Could Prices Go?
At Monday’s close, Chicago-traded wheat’s spot contract was up 2.8% at $7.9725, after surging to $8.0050 earlier in the session.
The last time Chicago wheat hit $8 was in December 2012 when it got as high as $8.7713.
Since May, Chicago wheat has also gained a compounded 20% and is up 24% for the whole year.
Sunil Kumar Dixit, chief technical strategist at skcharting.com, says wheat’s next major target is above $9. He explained:
“Concerted price consolidation seen on the daily as well as weekly charts of Chicago wheat resulted in a robust multi year range break out above $769.40 that clocked $807.75.”
“Stochastic RSI readings of 86/77 on the monthly and 82/67 on the weekly charts are also exhibiting a very bullish set up packed with enough fuel for propulsion toward the 2012 high of $9.4450 as the next big thing above $8.00.”
If it gets beyond the $9.50 level, there is a $9.8550 stop dating back to April 2008 and the May 2008 peak of $12.98.
Dixit thinks exhaustion will set in for Chicago wheat well before that, leading to the phase of corrections.
“The monthly chart presents a classic Rounding Bottom formation with $9.4450 as the top and $3.81 as the bottom while the current wave aims retesting the formation top of $9.4450.”
“If the short-term daily chart Stochastic RSI is overbought at 100/98, hence correction to the middle Bollinger Band of $7.50 and 50-Day Exponential Moving Average of $7.35 can be seen on short term with critical support at $7.07 which is the 100 Day-Simple Moving Average," he added.
Disclaimer: Barani Krishnan 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. He does not hold a position in the commodities and securities he writes about.