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Ray Grabanski: Gut check time for bulls

Markets have found a weak spot recently, with soybeans dropping $3 from
recent highs in just a few weeks, and wheat dropping nearly $3 winter and $5
spring on futures months. This debacle comes after a scare in the banking
industry (Bear Stearns collapse) and a little manipulation of the grain
market rules (new price limits and speculative trading rule consideration)
that combined to scare out many traders. There just aren't many traders who
can tolerate this type of volatility - even the grain industry is moving away
from trading!

The huge liquidation of long commodity positions is pressuring all
commodities. This is an interesting response to a stimulatory monetary
policy move by the FED earlier this week. Generally, one would expect a
lower dollar and higher commodities from an inflationary type FED response,
but instead the commodities are dropping from it and the dollar is higher.
But the real reason for the big selloff in commodities is the liquidation of
futures positions to generate cash by funds. This is an odd response, as
funds typically pay in entirety for futures they buy as they do not trade on
margin or leverage. Why do they need to generate cash now when monetary
policy is going their way?

However, if these funds are owned by investment banks who are deep into the
housing mortgage loan crises, then that is another story. For months, we've
been talking about the 'Goldman Sachs' roll forward in commodity hedge funds.
If Goldman Sachs (or other bank investors) are having a liquidity problem
(like Bear Stearns last week), then it is entirely understandable why they
are liquidating futures positions to generate cash. For every position
liquidated, they generate the full cash to own the commodity. So if their
other investments are going bad (housing loans) and there is a run on their
financial assets, that would explain the reasoning for their pull back in
commodity investments.

How long this liquidation will persist, no one really knows. But this
certainly is not based on fundamental analysis, or even on a logical response
to world economic situations. This is simply a money response. But since
commodity trading has become so much a money game recently, perhaps it makes
sense that the liquidation of these long positions is a money proposition,
too?

This is truly a gut check for bulls, who are having a hard time imagining a
market top on no change in fundamentals whatsoever. Of course, there really
hasn't been any change in fundamentals from last fall, either. Prices have
swooned up, and now swooned down. The US still has tight supplies of grain,
just as we did last fall. However, we are closer to the harvest of new crop
wheat, which is probably only about 3 months away now. Still, its prior to
new crop harvest that markets are most susceptible to being manipulated by
speculators - squeezing markets during delivery (May???).

Speculators seem to believe that oilseeds will get plenty of acreage this
spring in the US, with soybeans expected to steal even more acreage from corn
than private and USDA estimates so far. So soybean prices have dropped $3
from highs just a few weeks ago. Perception is reality, and of course, the
$3 drop since March 1 won't change soybean planting intentions reported the
end of this month, as these intentions are as of March 1. The recent break
in soybeans won't cut that number at all - even if farmers switch millions of
acres back to corn since that time. Perception indeed is reality, and the
perception is that lots of oilseeds will get planted.

In past times, these types of price breaks would certainly be termed market
tops. Technicians would jump on the short side of the market, and all would
be lost for speculators as bears would swoon in and push the market lower.
All is saved with a new crop year, and once we are through the crunch of
short supplies, the big surplus is certain to come, right? However, these
are not like old times. Demand for corn continues to ratchet higher, and we
still have very expensive oil/energy that the US still needs to do something
about.

If something very strong comes along to break the negative perception of the
soybean market (like planting or reproduction problems), perhaps soybeans can
still run to new highs yet this year. But it will take a dynamic change in
perceptions (if not reality) to break the negative outlook established by
lower highs and lower lows (in other words, a downtrend). In wheat, it might
take a real act of God for prices to go to new highs. Perhaps the best we
can hope for is a bounce back near old highs with some type of production
problem. But even with a bullish development, Pro Ag is doubtful that new
highs can be achieved in the wheat market. In fact, multi-year (or even
multi-decade) highs might have been already established. Corn could still be
an interesting story yet to unfold. If acreage falls below 86 million the
end of this month, we could be into new high territory in corn in April -
with the whole season yet ahead of us. However, with the huge selloff of
speculative longs and the negative technical picture today, a whole lot of
bullish enthusiasm has been wiped out of grain markets this past week. Yes,
its gut check time for bulls!

The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable. The
opinions and recommendations contained are based on our judgement and do not
guarantee profits will be achieved or that losses will not be incurred.
Recommendations should not be construed as an offer to buy or sell
commodities. There is substantial risk of loss in trading futures and
options on futures.

Ray Grabanski is President of Progressive Ag, a marketing and risk
management firm for farmers located in Fargo, ND. For questions or
comments, or if you are interested in more information about Progressive Ag
services, call 1-800-450-1404.

Markets have found a weak spot recently, with soybeans dropping $3 from recent highs in just a few weeks, and wheat dropping nearly $3 winter and $5 spring on futures months. This debacle comes after a scare in the banking industry (Bear Stearns collapse) and a little manipulation of the grain market rules (new price limits and speculative trading rule consideration) that combined to scare out many traders. There just aren't many traders who can tolerate this type of volatility - even the grain industry is moving away from trading!

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