Healthy wheat price has its ups and downs

THE wheat price for decades sparked little interest in the Western world beyond commodity traders and farmers. The grain seemed plentiful and cheap and shortages were distant Third World tragedies of war or drought.

THE wheat price for decades sparked little interest in the Western world beyond commodity traders and farmers. The grain seemed plentiful and cheap and shortages were distant Third World tragedies of war or drought.

But late last decade all that changed. Between 2005 and 2008 China's exploding hunger for animal protein, rising oil prices that lifted fertiliser costs and growing demand for grain-based biofuels pushed prices up. From mid-2007 wheat spiked dramatically, with the futures price reaching a record $US10.86 a bushel on the Chicago Board of Trade in mid-2008.

That was accompanied by record low levels of grain stocks in the US and elsewhere and food riots across the developing world as basic foodstuffs became unaffordable for many. The global financial crisis turned the situation around as this chart, produced by Alan Clement, an international futures trader and member of the Australian Technical Analysts Association, shows and wheat fell to $US4.50 a bushel in early 2010.

Then the market moved into a consolidation phase, trading within the bounds of the tightening triangle formation in the chart.

But this June the price began to spike again. Wheat has had its biggest monthly rise in three decades and is now up more than 50 per cent on lows experienced last year, driven by severe drought across the grain belts of Russia and the US. As a result, wheat convincingly broke out on the upside of the triangle formation at $US7.25.

Clement sees the market now as overbought in the short term and says we may see some retracement before any further price rises eventuate. Previous price action on the chart has left little or no overhead resistance, Clement says, and if the price turns upward again the next target price would be the record of $10.86.

If the high is breached, then the next target could be $US14.25. That is calculated by taking the breakout point on the triangle of $US7.25 and projecting it upwards by the pattern height of $US7, indicated by the left-hand green vertical line on the chart. Clement says that target is a little speculative at this point.

"With such a convincing breakout from the triangle, a reversal appears unlikely, but if [the] price were to fall back below the upper triangle boundary, then we would have to consider the breakout a failure and reassess the situation," Clement says.

Needless to say, a higher wheat price will flow through to higher food prices globally. While this will likely hit poor countries hardest, it remains to be seen whether this precipitates the shortages and panic of 2007 and 2008. On the upside, Australian wheat farmers will benefit from higher market prices in what, for many, will be a good growing season.

You don't need to be a wheat cocky to get exposure to the market. There is a wheat ETF product offered by ETF Securities and a range of contracts for difference on wheat offered by the likes of IG Markets. For those who know what they are doing there is the option of trading wheat futures in the US.

This column is not advice.

rodmyr@gmail.com

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