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Ray Grabanski: Gut check time for bulls

Agriculture.com Staff 03/21/2008 @ 8:30am

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.

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