Meet BIF, the marketplace bully
Allow me to introduce you to BIF (Big Index Funds), the marketplace bully. He has just joined us in the wheat and corn markets, now owning 1 billion bushels of corn in futures positions (almost the entire 2006/07 carryout) and 300 mb of wheat (again, almost the entire new crop carryout).
BIF roams the market schoolyard to find markets that have small participation. He also looks for the possibility of shocking the market with large price moves by simply plowing money into the long or short side of a market. The market is vulnerable to BIF's bullying, if there are some weaknesses in it to exploit (bullish or bearish).
BIF now seems to have strong control of the wheat (and perhaps corn) market by owning nearly the entire carryout for 2006/07. Also, he is a big market bully that likes to overdo things a lot, as that is how he makes his money. BIF should push the market quite a bit further than fundamentals or any other factor could predict (a lot like soybeans last year), get everyone bullish (covering shorts and buying long) with the huge gains, and then with no change in fundamentals he'll start selling and push it lower.
The market will not top until BIF decides it will top, and usually that isn't until everyone turns bullish. Fundamentals have no impact on the market for the period that BIF is in control. To trade wheat for the next few weeks, we have to think about what motivates BIF, and what will force him to liquidate or reverse his position (he likes to do it before anyone else).
BIF is someone who has too much money to fight in the marketplace in the short term, so we have to try to use BIF to get a higher price for our commodities. BIF does farmers a favor by pushing markets much higher than they normally could go (who would have expected $5 wheat!), so he can be a farmer's friend if we learn how to use him to our advantage (ie sell grain when prices are too high for fundamentals).
We need to make sure we are making money when BIF pulls his money play, and that's why we need to keep a certain portion of our sales in puts (and roll them up as prices roll higher) as BIF inflates grains (whatever time period he decides to inflate them).
Currently BIF appears to have decided to inflate wheat and corn, and USDA has accommodated him with the most recent reports. Until the next USDA report, then, BIF can control this market (which is another 3 weeks). BIF will likely blow the top off this market in that 3 week period (as we are $1 over fundamental values in soybeans and wheat, 10-20c over fundamental values in corn today). And then he will turn the market lower all the way into harvest (just when everyone else turns bullish), when harvest lows will be formed.
BIF makes his money by pushing markets much further during spring peaks (May/June), and then pushing markets much lower than fundamentals suggest during harvest lows. Don't get caught getting bullish on BIF's market distorting trades now, and buy back hedges (and never replace them) to ride the market lower all the way into harvest. All hedges up to yesterday have been losers in wheat and corn, and BIF has made the temptation great for you to lift those hedges and stop making margin calls. It's a mistake to do so, though, as spring is exactly when you want to get a majority of your pre-harvest sales done (and that's exactly what Pro Ag has recommended).