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Fundamentals rise up

Agriculture.com Staff 02/06/2006 @ 8:51am

Fundamentals still come to the forefront every so often. Rain in Argentina and the promise of this rain spreading into southern Brazil caused soybean prices to break yesterday. The markets had been jittery about this for almost a week, and perhaps it was pure relief that rain has fallen in South America in the past few days. In any case, the South American crop (except for a minor area in Brazil) should be adequately watered.

Fundamentals are also impacting the corn market, as a second week in a row of large corn export sales has supported prices. This is a market that is also significantly impacted by continued speculative fund buying. Open interest in corn futures has been increasing in January as funds are estimated to have bought 180,000 to 200,000 contracts since December 31st. Just in the last week, funds have bought 90,000 contracts. Although there was a break in prices in the middle of January, prices today and at the end of 2005 are virtually identical.

This fund buying may provide an opportunity for wider spreads between the different corn contract months. Speculative longs in March corn futures will have to be rolled to other months. The process of buying May or July contracts while selling the March should cause the price difference between the months to become larger. Farmers can benefit by selling corn for a deferred delivery month at a higher price and more than earn the cost of storage. This widening of the spreads happened as funds rolled out of December, 2005 contracts and into March contracts.

On the weather front, the existence of a weak La Nina has been confirmed by US government forecasters. The pool of cooler than normal water off the coast of South America has been building for awhile. This is not yet a strong weather phenomenon, but certainly the drought in the Southern Plains is typical during a La Nina pattern. Effects on the Midwest are not as clear cut. The last La Nina was in 2000-2001. Yields were actually record large in 2000 and decent in 2001 for both corn and soybeans.

The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.

Fundamentals still come to the forefront every so often. Rain in Argentina and the promise of this rain spreading into southern Brazil caused soybean prices to break yesterday. The markets had been jittery about this for almost a week, and perhaps it was pure relief that rain has fallen in South America in the past few days. In any case, the South American crop (except for a minor area in Brazil) should be adequately watered.

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