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Since the first half of December, open interest in wheat has headed straight up with only a handful of very minor corrections. This has come regardless of which way the market was headed, although the biggest gains in open interest have occurred since the start of this year when wheat started moving straight down. The question now is whether this added open interest consists mainly of index funds getting long, trend-following funds getting short or a combination of the two. One reason this matters is that trend-followers are getting heavily short. In fact, they are within 8200 contracts of their all-time record net short position of over 69,000 contracts that was established in September, 2009. If the trend-followers continue to press the market and this comes in conjunction with general liquidation selling by index funds, it would be enough to push the May wheat contract below the early October lows at 472 and possibly as low as 438.
A sell-off in the dollar could be enough to forestall this bearish scenario for a few weeks, but the combination of weak export demand for US soft red winter wheat and the possibility of ongoing liquidation weakness in the grains and equities would seem to tip the scales in favor of continued declines in wheat. Keep in mind that cumulative export sales for the 2009/10 season are still behind the pace to reach the USDA projection for the entire season. This suggests that export demand is even weaker than the current USDA forecast, which happens to be at the lowest level in nearly 40 years.
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