Wheat resumes rally – now on to $15?

Are you still unconvinced to trade Wheat (and also Corn and Soybeans) following my extensive coverage? Yes, there are so many other markets where most traders gravitate to from stock indexes to individual shares to gold and so on. We all have biases that favour particular markets. With my early exposure to trading the US grains futures markets when living in Washington D.C. I have always had an interest in them even in the years of over-supply when prices were low.

The business of grain production has long fascinated me.

And last year when I saw the possibility that conditions were about to change to a more bullish scenario, I started to take a very active interest. 

Last week I posted the Wheat chart that offered my forecast for an immediate rally.  The setup was particularly inviting with the three down to a mom div and to a Fib level.  This was last week’s chart:

and last week, prices rallied and this is the current chart

As advertised, the market has advanced to my first target area.

Of course, what is inspiring the bulls is the massive disruption to the vital Ukraine production and supplies which is now reaching the MSM headlines. This is a massive game-changer that few saw coming last year when the markets started moving higher.

Back then, many were asking why grain markets were slowly improving in the face of massive over-production of most ags. But that is what markets do – they anticipate the news to come. Few could have seen the Ukraine disaster then, but I knew that the remedy of low prices was low prices.

In other words, the longer prices stayed low, the less incentive farmers have to produce that crop – and eventually supplies would come more into balance with demand (in a rising global population with higher incomes especially in less-developed nations).

So when was the last time you saw Wheat hitting the headlines? Certainly not last year when prices were low!  But it is a major business story now which naturally has attracted many investors/traders  into the market who previously had only a passing interest in Wheat (in the form of artisan beads?).

And that has introduced a major risk.   With so many amateur grain traders now in the market, wild swings are becoming much more likely Bitcoin-style.  And glancing at the monthly chart, we are in the upper stratosphere near the ATH of $13.50. How much higher can it go?

Of course, bread prices are rising in most less-developed regions where the input cost of the flour is a much larger part of the bread price than it is in the West.  Here, the flour cost in a £1 loaf is still pennies, but with baking costs also rising as energy prices surge, the pressure is on for higher consumer prices.

In other words, Wheat prices can move higher before final flour demand could possibly weaken.  It is a relatively inelastic commodity.  I believe $15 and higher is not an unrealistic target.

Crude oil – are new highs still to come?

Last year, just when the War on Fossil was getting into its stride with very public showcase demonstrations by groups such as Extinction Rebellion (XR) glueing themselves to roads, subway trains, busses and even aircraft.  Maybe that latter one was a commercial for the strength of superglue when subject to the force of a jumbo-jet take-off.  Or maybe not.

But from a market timing perspective, these public demonstrations occurred as crude was surging into new highs.  And I note that these demonstrations have recently picked up in the UK – just when crude oil appears to have corrected to a major low and has moved above the $100 mark again.

Is XR activity a signal to expect new highs?

So is it possible there is some connection between not only XR activity and surging oil prices? Not only that, but there seems to be a strong regulatory push for large UK and US companies to publish and minimize their ‘carbon footprints’. The field of ESG (environmental Social Governance) funds is mushrooming as investors are jumping on the Save the Planet bandwagon.

In the time-honoured tradition of new surging trends in finance leading to huge unintended consequences, honest observers acknowledge that the War on Fossil is largely behind the record surge in energy and food prices that is leading to the current rampant rate of price inflation. 

Wheat needs fertilizer and fuel for the diesel-powered tractors – all derived from fossil.  And the higher the input costs for farmers, the less likely they are to plant to Wheat, thus adding to upward market pressure.

We are now witnessing the Mother of all Unintended Consequences – and will likely produce an economic recession/depression down the road.  Thanks, Net Zero!

As it stands, any large-scale energy breakthroughs that could cut fossil demand seem a very long way off – and anyway, would involve trillions in the switch-over from fossil to renewables/nuclear.  Maybe nuclear fusion – a long-held dream – will deliver – but my money is not on that bet.

And the crude chart certainly suggests new highs lie just ahead:

The $128 ATH was made in early March which met my target area.  Then, in a repeat of past energy crises, the US threatened to release stocks from its stockpile and that was all the excuse needed to take major trading profits off the table.

But the market has traced out a convincing triangle pattern in three waves and triangles usually occur in fourth wave positions.  Thus, odds favour new highs in a fifth wave.  But with volatility high, extreme care is needed to find low risk entries.

Why?  Because many markets are ‘upside down’ in the words of one prominent trader.  Even Bloomberg has a story today: “How to make sense of today’s upside-down markets”

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Stocks at crossroads

So where does all this leave stocks?  Can rising oil prices be good for shares?  Conventionally, rising price inflation is not good for shares as interest rates rise to ‘combat inflation’, heavily-indebted companies (most of them) have earnings eaten away by rising bond coupon payments.  In addition, consumers are seeing their disposable incomes fall as they shell out up to £100 to fill their tank along with rising grocery prices.

With shares fully (or greater) valued, can shares be kept aloft by belief in technology break-throughs that could transform the energy landscape and kill off the fossil sector?  Much work is being done on hydrogen as a power source but large-scale applications appear some distance away.

My view has always been that such transformation on the large national scale needed is pie-in-the-sky at this stage.  Maybe doable in 10 – 20 years, but not now.

With government pressure on the unproved renewables and their active discouragement on fossil, the scene is set for higher oil and energy prices into the foreseeable, and a recession/depression down the road.

Shares should roll over soon.