- 2002: Volume 11, No. 2 Is it Time for Wheat to Rally?

The wheat market has been a topic of much debate for the past several years as analysts and private forecasters have anticipated a rally in wheat, which actually began a major downtrend in 1996. We believe that downtrend is finally ready to change! With below average U.S. production and prices hovering near 20-year lows, traders have watched and waited... and waited... and waited... for wheat to make a move-yet nothing happens. To understand the complacency of wheat prices we must first look into the simple supply versus demand situation.

Unlike Soybeans, which are produced in only three geographic locations in the world (North America, South America, and China), wheat has the ability to be grown nearly anywhere. With this simple concept in mind, it is easy to see that for wheat to develop a broad—based rally, supply must be at risk in at least one of the major production areas. Without this "risk of supply," traders rarely look upon any given commodity as an investment opportunity.

World Wheat Production (1999-2001 Average Production)
1. China 2. European Union 3. Former Soviet Union 4. India 5. United States	17.6% 16.9% 12.6% 12.3% 10.1%
Total Production of Top 5 Source: USDA	69.5%

Through improvements in genetics and production practices, wheat has become a crop that is almost impossible to destroy. Wheat is extremely resilient to temperature and moisture fluctuations and is mostly vulnerable only during its critical reproduction "heading" phase. Traders who witnessed the "freeze-rally" of 1996 remember all too well how Mother Nature played an incredible trick on the "wheat-bulls" and turned a crop that looked to have been completely devastated by a late spring frost into an above-average year for most farmers in the HRW (Hard Red Winter Wheat) region.

U.S. All Wheat Production (1999-2001 Average Production)
1. Kansas 2. North Dakota 3. Washington 4. Oklahoma 5. Montana	17.1% 13.1% 6.5% 6.4% 5.9%
Total Production of Top 5 Source: USDA	49.0%

Supply is not our only concern, however. As in any commodity, there must also be demand. As I've told many clients in the past, "It doesn't matter how much we have of something… it's how many people want what we have." Export business is currently seven percent behind last year's level and domestic usage is stagnant. Bearish traders have focused solely on export business and domestic usage over the past three years and have been right every step of the way. Not only was wheat in the U.S. overpriced versus our competitors, but the high value of the U.S. dollar made exporting anything from the U.S. difficult for commodity producers. One glimmer of hope for wheat exporters is the inclusion of China into the World Trade Organization and the buying power this country holds. Unfortunately, China has yet to make any major purchases; however, the door is now open for them to do so as GMO issues have been resolved between the U.S. and China as of March 2002.

U.S. and World Fundamentals
United States	2001/02 Crop Year	2000/01 Crop Year	5-Year Average	15-Year High (Year Occured)	15-Year Low (Year Occured)
Production (Billion Bu.) Bushels/Acre Planted Acres (Million) Harvested Acres (Million) Total Usage (Billion Bu.) Ending Stocks (Billion Bu.)	1.958 40.20 59.60 48.700 2.228 0.701	2.232 42.00 62.60 53.100 2.396 0.876	2.303 41.50 64.20 55.500 2.348 0.839	2.730 (90) 43.2 (98) 77.0 (90) 69.1 (90) 2.684 (87) 1.261 (87)	1.812 (88) 32.7 (89) 59.6 (01) 48.7 (01) 2.224 (89) 0.376 (95)
World
Production (MMT) Ending Stocks (MMT)	579.0 154.3	583.2 164.1	589.2 167.1	609.2 (97) 176.1 (98)	495.0 (88) 134.0 (88)
Source: USDA

Where do we go from here? As we head into April and May, we enter one of the most critical (and volatile) times of the year for wheat. During this time, U.S. Spring Wheat is planted, China, Russia, Europe, and U.S. Winter Wheat breaks dormancy and begins to "head," and India completes its harvest. Problems in any of these growing regions could impact production figures as well as prices.

Currently the central and southern Plains HRW growing regions are excessively dry. Fall seedings of the wheat crop went very well, however the lack of moisture kept the wheat from "stooling" out thus providing very poor root development as the crop went into dormancy for the winter. Lack of snow cover during the winter, rapid temperature swings, Army Worm infestations, and wind erosion have all contributed to one of the poorest crop condition ratings in several years. In a recent survey by the USDA, Kansas' wheat crop which is already the smallest planted acreage since 1971 was rated at an astonishing 42 percent poor to very poor, conversely Oklahoma was 56 percent poor to very poor, and Texas 44 percent poor to very poor.

Combine the current poor condition of the winter wheat crop with a record-large short position held by funds (Source: CBOT Commitment of Traders as of March 5, 2002), we believe the market is presenting a bullish scenario. Any problems with this year's wheat crop could force funds to buy-back their short positions and go long. The psychology of the grain complex turned bearish following the rally in 1996 and since 1998 we've remained in a sideways channel. Should this market change its trend, we feel a significant retracement on the monthly charts is possible. (See Figures 1, 2, and 3.)

Figure 1:

Figure 2:

Figure 3:

Recommendation
While the market is yet to make a technical move to the upside, we favor purchasing Chicago and Kansas City July wheat call's. Weekly crop condition ratings become available for the nation's entire wheat crop beginning April 1, and it is at this time that we feel a move in the market is most likely. Our advice for futures traders is to purchase July and December futures risking all positions to a weekly close below $2.52 basis July Chicago and below $2.68 basis July Kansas City.

Chris Haverkamp is president of Paragon Investments, Inc. which offers full service and discount brokerage services in commodities and stocks. He is also a founding partner of Midwest Ag Consulting, Co, an ag based commodity trading advisor, located in Topeka, Kansas. Haverkamp provides advisory and clearing services to institutional and retail clients. He is registered with the NFA as a principal and associated person for both Paragon Investments, Inc. and Midwest Ag Consulting, Co. Additionally, he is licensed as a Registered Investment Advisor with the State of Kansas and also holds a Series 7 brokerage license with the NASD.

To view his daily comments please visit: www.4-paragon.com

He can be reached at: Paragon Investments, Inc., 10711 NW 46th Street, Silver Lake, KS 66539; phone, 888-452-8751 or 785-582-9527; e-mail: chris@4-paragon.com

Past performance results are not necessarily indicative of future results. Futures trading involves substantial risk of loss and is not suitable for all investors.

The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources believed to be reliable. The opinions and recommendations contained are based on our judgment and we do not guarantee that profits will be achieved, or that any losses will be incurred. Recommendations made should not be construed as an offer to buy or sell commodities.