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Back to reality

Agriculture.com Staff 10/04/2007 @ 2:28pm

Tuesday was a nasty surprise for many commodity markets. Gold, silver, grains - you name it, they all suffered substantial price declines. The US dollar took a break from its recent dive and acted like it was trying to bottom. This allowed rampant inflation fears to let up and commodity prices suffered.

Corn and soybeans dealt with additional negative news, as one of the first pre-October crop report estimates was released and the numbers were large. It has become easy for some analysts to pencil in corn carryout at over 2.0 billion bushels, hardly a bullish scenario. Increased crop size, increased exports, decreased feed use and less ethanol expansion have the net effect of loosening the supply/demand situation.

The idea that ethanol grind will be less than previously thought is gaining more traction. While it is understandable that an ethanol plant in the beginning stages of construction (earth-moving, utilities, etc.) would suspend work (Verasun's plant in Reynolds, Indiana is an example), it is far less understandable how ethanol plants which will be completed in the next six months or so would suspend work. They have made the substantial investment and now need to generate cash to pay expenses. They may also have hedges in place so the cash market is not an accurate reflection of profitability.

The ethanol blending situation is more of an issue. Remember that oil refiners and blenders are hardly big ethanol supporters. Anything that takes away volume from their products is a negative. To them, ethanol is an additive to improve octane ratings, nothing more. Their "do only what's absolutely necessary" attitude does not give the market comfort that the increasing supplies of ethanol will be absorbed by blenders.

There is also the reality that this is the middle of a very active harvest period. So far, there have been only brief interruptions and harvest is ahead of last year and the five-year average. If the corn market is going to make some sort of a harvest bottom, it often does it when harvest is 50 percent (or more) complete. That should occur in the next week or two.

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 situation.

Tuesday was a nasty surprise for many commodity markets. Gold, silver, grains - you name it, they all suffered substantial price declines. The US dollar took a break from its recent dive and acted like it was trying to bottom. This allowed rampant inflation fears to let up and commodity prices suffered.

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