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Todd's Take                   05/20 10:25

   Mr. Market Interrupts Bull Move in Wheat Prices

   New all-time highs for July KC wheat on Tuesday were blunted by a sharp 
sell-off in the stock market on Wednesday, erratic behavior that may require 
medication for the noncommercials involved.

Todd Hultman
DTN Lead Analyst

   One of the main duties and pleasures of a DTN market analyst is to inform 
and explain the market's moves each day, and I have to say this week's price 
moves added a new chapter in volatile market behavior. With market influences 
becoming increasingly complex, this seems like a good time to remind readers of 
Mr. Market.

   As Omaha investor Warren Buffett explained in his 1987 letter to 
shareholders of Berkshire Hathaway 
(https://www.berkshirehathaway.com/letters/1987.html), Mr. Market was a 
creation of his mentor, Ben Graham, used to help explain the proper way to look 
at markets. Mr. Market is described as a poor fellow with incurable emotional 
problems, sometimes given to bouts of euphoria and at other times, so 
hopelessly depressed that he can't imagine the sun ever rising again.

   Usually, it takes some time for Mr. Market's mood to switch from one extreme 
to the other. But this week, we saw a back-to-back display of Mr. Market's 
bipolar moods in wheat.

   On Monday, May 16, new-crop contracts of all three U.S. wheats closed up 
their daily limits after India's government announced a ban on wheat exports. 
India's crops have been hurt lately by a chronic heatwave, and U.S. wheat crops 
are struggling with drought in the southwestern Plains and hostile planting 
conditions in the Northern Plains. Crops in northern Europe need more rain and 
the same may be true in China.

   On Tuesday, July KC wheat closed at $13.67 3/4, the highest close ever for a 
July contract, just as the Wheat Quality Council's Hard Red Winter (HRW) Wheat 
Tour was getting underway. By Thursday afternoon, the tour would announce a 
wheat production estimate for Kansas of 261 million bushels (mb), down from 
last year's 364 mb. As USDA has been correctly warning, drought in the HRW 
wheat region is for real.

   With world wheat supplies already tight from last year, Russia is keeping up 
its attack on Ukraine, while major wheat regions are encountering threatening 
weather and high fertilizer prices. The concerns about world wheat supplies 
being insufficient in 2022 are legitimate. It is difficult to imagine a more 
bullish set of circumstances.

   The very next day after July KC wheat posted its highest close on record, 
prices promptly fell 72 1/2 cents the next two days as noncommercials couldn't 
get out of their long positions fast enough.

   Was there some shocking wheat news revealed? Did someone discover a long, 
lost underground storage facility of wheat somewhere?

   No. Wednesday's selling in wheat was triggered by Mr. Market's anxiety 
attack in the stock market as the Dow Jones Industrials plummeted over 1,100 
points. Not only have concerns been building about rising energy prices and a 
tighter Fed policy being sought to restrain inflation, but investors were also 
horrified to discover Walmart only earned $2.05 billion in the first quarter 
and Target's net income came in at just over $1.0 billion for the most recent 
quarter.

   Oh, the pain of it all! The whole economy is going to hell, concluded 
investors and widespread selling gushed across the commodity board as well.

   As a market analyst, it is difficult to compare the situation of some of the 
poorest nations in the world facing the task of having to pay sharply higher 
prices for limited supplies of wheat that many of their people need to survive 
in 2022 versus hedge fund managers panicking because they're going to miss 
their quarterly bonuses. But in the land of noncommercial behavior, this is how 
the world works and it helps to keep Ben Graham's view of Mr. Market in mind.

   To try to keep our feet on the ground, here is a snapshot of the complex 
situation markets currently face. U.S. oil production remains paralyzed by 
massive financial losses the industry suffered in 2020 and is still 1.1 million 
barrels a day short of where it was before the pandemic. South American drought 
is limiting corn and soybean production in 2022, keeping U.S. exports active 
and U.S. supplies low.

   The war in Ukraine is not only robbing the world of one of the top exporters 
of wheat, corn, barley and sunflower seeds in the world, it is also driving up 
oil and gas prices in the U.S. as Europe looks for ways to become less 
dependent on Russian fuel -- a task that Europe has neglected for years and is 
not prepared for now.

   Fertilizers were already expensive before the war on Ukraine, but the 
situation is even worse now as rising energy prices and war-related sanctions 
have made fertilizers more scarce and more expensive throughout the world. The 
obvious result is higher food production costs and less production anticipated 
in 2022.

   Those same rising energy and food prices are fueling inflation concerns in 
the West and have pushed the Federal Reserve into a more hawkish stance. 
Federal Reserve Chairman Jerome Powell has taken a lot of criticism for not 
raising interest rates sooner. But the more obvious point is that raising 
interest rates won't increase oil production, cause crops to grow in dry soil, 
dry out flooded North Dakota fields or allow Ukraine to grow and export grain 
through the Black Sea.

   Perhaps a better prescription than higher interest rates for what ails 
markets would be some actual prescriptions. It wouldn't hurt for Mr. Market to 
calm down a little and there is one other unstable actor on today's world stage 
that could use some strong medication; until the war ends and we all find a way 
to become more energy independent, it's going to be difficult to unravel the 
tangled mess of problems the markets currently face.

   **

   Comments above are for educational purposes only and are not meant as 
specific trade recommendations. The buying and selling of grain or grain 
futures or options involve substantial risk and are not suitable for everyone.

   Todd Hultman can be reached at Todd.Hultman@dtn.com

   Follow him on Twitter @ToddHultman1




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