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U.S. Wheat Associates reports:

The downward trend in wheat futures the last three months has been a bit of a puzzle to a lot of buyers and sellers. While the wheat market fundamentals appear mostly bullish, wheat futures have fallen 20 percent on average since Nov. 8, 2012. Declining world production estimates and crop damaging weather have not supported the markets and the slide stands as a reminder that complicated dynamics are driving today's wheat market.

"The biggest reason for the drop in wheat futures," said Mike Krueger of The Money Farm, "has been an exodus of speculative money from the markets in late November and early December due to concerns about the approaching fiscal cliff in the United States."

Krueger said uncertainty created by the U.S. government's budget battles overwhelmed any bullish wheat news at the time. Investors and investment funds looking for new opportunities pulled money out of commodities into the stock market, for example, which has performed extremely well the last few months. That erased the incentive to stay in or return to declining commodity markets.

In addition, "no commodity is an island," said as Jay O'Neil, senior agricultural economist at the International Grains Program. He noted that the corn market is also weighing heavily on wheat. An estimated 42 percent year-over-year drop in export demand for U.S. corn has pressured corn prices and, in turn, the wheat markets. Many times in the last three months, the grain traders I talk to have blamed a daily loss in wheat on weakness in corn futures.

These factors eclipsed apparently bullish wheat fundamentals. For the better part of a year, the story dominating U.S. agricultural news has been the ongoing drought that slashed corn production in 2012 and threatens the 2012/13 wheat crop. However, until last week, that narrative had not changed for many months. O'Neil says a bull market needs new information every day and wheat simply ran out of momentum months ago. The bearish news of the first major winter storms finally provided new information last week.

Many people anticipate that lower U.S. wheat prices will increase demand for U.S. exports. In addition, reports have circulated on and off for months that several major wheat producers are short on exportable supplies. Both factors should support U.S. prices but, again, this a static narrative that no longer influences the market.

The presence of Ukraine, India, Canada and Australia in tender offers suggests they still have wheat to sell. The European Union is expected to draw down stocks to its lowest level on record. In addition, Russia has imported an estimated 1 million metric tons of wheat from Kazakhstan this year.

"Even when we think some suppliers might be sold out, they sell more" Krueger said. Until something new happens to change the scenario, these theoretic factors will not greatly impact wheat futures.

Both Krueger and O'Neil say weather and its impact on winter wheat potential and spring wheat planting decisions will probably drive wheat prices in the next few months. In fact, prices the past two days have dipped even more as a large winter storm brought rain, freezing rain or snow to the central and southern plains where most of the U.S. hard red winter wheat is grown. But analysts caution that general economic uncertainty, especially in the United States and Europe, will continue to influence the commodities markets.

In trying to understand the movements of wheat markets, it is ineffective to simply add up all the factors and determine if they are more bullish or more bearish.

Instead, the volatility continues and it may be even more important to ask: What has changed since yesterday?

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