The Wheat Rally Has Begun. For How Long?

| About: Teucrium Wheat (WEAT)
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Summary

Technical analysis clearly points to the start of a price rally in the wheat market.

External demand for the U.S. wheat is growing.

The record wheat ending stocks limit the growth potential of the wheat futures price.

All main technical analysis indicators show that a bullish trend is emerging in the wheat market: a double bottom pattern has formed, key market indicators have given a buy signal, and the December wheat futures demonstrated the daily growth of more than 5% on October 13, completing the trading session above the key resistance level of $4.10.

Based on Fibonacci retracement, if the December wheat futures price reaches the level of $4.25, it will mean a high probability of further price growth up to $4.50.

But will the growth continue further? This is a really interesting question.

In my opinion, the increase in price which is now observed in wheat and corn markets is associated primarily with the hope for a high and stable export. Indeed, at the moment, the United States is exporting record volume of wheat.

As of the first week of October, accumulated exports of the U.S. wheat together with the outstanding sales totaled 14.417 million tons. This figure is 3.07 million tons higher than the result on the same date in 2015 and 0.477 million tons higher than in 2014.

Source of data: USDA

The increase in external demand for the U.S. wheat is also reflected in the dynamics of the USDA forecasts. In this context, we are observing an unusual situation this year.

In May this year, when the USDA published its first American wheat exports forecast for 2016/17, the export potential was estimated well below the first export forecasts for 2015/14 and 2014/15. Currently, the USDA predicts total 2016/17 wheat exports at a level that already exceeds last year's result and significantly exceeds the result of 2014/15:

Source of data: USDA

In other words, this year, unlike the previous two years, since the beginning of the marketing season, the demand for American wheat has been growing and not declining. This makes the current year qualitatively different.

But let's also not forget that as of September 1, the wheat ending stocks in the United States were a record high for at least the last 10 years. This was a result of relatively low domestic demand for wheat.

Source of data: USDA

The ratio of September 1 wheat ending stocks to the estimated exports, calculated for the current year, is 38.5%. A similar ratio calculated for last year was 36.9%. In other words, at the moment, the external demand for the U.S. wheat has still not been able to fully compensate for the observed lack of domestic demand.

The situation will probably change in the near future, but in my opinion, $4.50 is the maximum price wheat futures will be able to reach in the next month.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.