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Volatility zooms and prices do, too

Agriculture.com Staff 10/19/2006 @ 2:48pm

The rush to adjust to the tight supply/demand situation for the 2006-2007 grain crops seems to have all occurred within the past five weeks. Spurred by the drought in Australia and ever shrinking crop estimates, wheat prices zoomed as exportable supplies dried up. Corn prices followed along, adjusting to the smaller crop size in the October crop production report.

Funny things happen when the market adjusts to such a shock. The shortage of wheat is definitely high-quality, bread wheat. But the Chicago (soft, lower quality) wheat prices were the strongest. Traders who had played the popular spreads for example, long the July, short the December found themselves on the wrong end and scrambled. Also a problem was the tendency to be short Chicago wheat and long almost anything else Kansas City wheat and corn being the most popular choices.

The spreads traded at their most extreme levels last week and have since corrected slightly. It would seem the panic is over, at least for awhile. It does not necessarily mean the highs are in. The tightness in the supply and demand situation has not gone away. This quick, sharp run-up in prices has made everyone more aware of the bullish fundamentals. But, it is unclear that high prices have caused a change in behavior. No one is shutting down an ethanol plant, reducing feed use or delaying export purchases.

Practically speaking, the change in the corn spreads means there is not as large a return to storage as in the past. This means it may be easier for farmers to sell corn and re-own it through futures and options (if they desire). Stronger basis levels make cash sales more attractive. While the market still shows that there is some money to be made holding corn, most farmers will have a hard time holding onto every bushel. The rally has made it easier to part with some.

The rush to adjust to the tight supply/demand situation for the 2006-2007 grain crops seems to have all occurred within the past five weeks. Spurred by the drought in Australia and ever shrinking crop estimates, wheat prices zoomed as exportable supplies dried up. Corn prices followed along, adjusting to the smaller crop size in the October crop production report.

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