Pressure From a Strong Dollar

In the 23 trading sessions following Dec. 18, 2014, the Chicago March wheat futures contract dropped $1.22 per bushel. The average bid for Pacific Northwest white wheat in Portland also declined by about 90 cents (approximately 73% of the Chicago move).

The primary drivers for this move down were simple; a large crop of wheat in the northern hemisphere last fall, and a very powerful upward move in the cost of U.S. Dollars to foreign buyers. A jump from near 89 to more than 95 in the Dollar Index represents as much as a 6.7% increase in the cost of wheat to a foreign buyer. Loosely speaking, that’s at least 33 cents per bushel that is not collected by the farmer.

The upward move of the U.S. Dollar to levels not seen in 12 years was itself driven by superior “real” interest rates for greenbacks compared to other currencies, and of course, fear. Global liquid wealth always finds its way to where it is treated the best. In a world of turmoil, the U.S. remains the go-to destination for liquidity, safety and stability, even though there have been forces at work for many years that would change this reality.

So U.S. wheat has consistently been more expensive than wheat from other sources. Add this factor to aggressive sales by Russian and European exporters since harvest and a decent crop in Australia, along with some economic disarray among buyers, particularly in the Middle East, and we have had a recipe for lower wheat prices.

All of the above is well known and has been chewed over by the trade. It’s old news. The “Futures” markets are set up to anticipate prices based on all that is known or suspected by the entire global trade, including all buyers, sellers, users and handlers, speculators and producers. If it is in the news, the market has already built it into prices.

A trend line is the result of a set of factors that emerge, combine, expand and fade through the calendar cycles. The present 30-day trend is just a “small” downward stroke in a larger move downward that began in the summer of 2012 from a high of $9.44 per bushel. The lowest point of that big trend was reached last October at a point 60 cents per bushel lower than present trading levels.

By many measures, the present price of Chicago wheat is within 40 cents of the center-point of that big trend-channel. It will take a decisive move above $6.50 per bushel, some $1.21 or more upward from today, to change the chart from negative to positive in that context. Everything else is short-term.

The price of wheat reflected by Chicago and the other wheat trading centers, including Portland, is as “real” as it ever gets. There is no better way to make it visible to all comers. The trend remains lower, but the next factor that has the power to change the price enough to change the pattern is coming; spring weather in the U.S. wheat belt, otherwise known as the “silly season.” The market ear will be tuning for this period soon, as emergence from dormancy begins to happen in only 6-8 weeks.

If there is a low point to be anticipated in wheat prices it will likely coincide with the onset of spring weather. Meanwhile, it seems likely that we will be in a relatively narrow price range without much drama (unless the politicians can come up with something new).

If we scrounge the barrel for fundamental or technical reasons for wheat to be higher priced in the next 90 days, there is precious little to add to the stone soup we have been simmering for the last month. The trend line is smoothly negative. This still allows for crazy bounces up along the way (see “silly” above), but that kind of event will be harder than average to capture.

Certainly the move is maturing and deserves some “correction.” Fibonacci says we have potential back up to at least the $5.73 level in Chicago March futures, maybe 30 cents in white wheat, but these things are measured from the low. How low is low? Stay tuned.

Information and opinions contained herein come from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital.