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Beginning of the bottom?
Grains have shown signs of bottoming, with an upside reversal Monday followed by
strength today in front of the USDA December report tomorrow morning. Most
expect the report to show larger ending stocks of corn, soybeans, and wheat for
world and US stocks. But then the market has halved its price of virtually
every commodity the past 5 months, so perhaps all that information is already in
the market??? On the other hand, the downtrend is still very well established,
and so far we haven't had a great deal of bullish news to reverse this trend.
While the grains have pushed into new lows, the DOW and S&P 500 have not,
holding above the 7500 DOW level and in fact rallying while the grains pushed
into new lows. Perhaps now we are getting to the point where the grains are
finally finding 'value' in the marketplace, and it's the financials that are
finally starting to stabilize the grains (now that's a switch!). After all,
cash corn prices are only about 1/3 what they were in July in weak basis
locations ($2.50 now vs. $7.50 in July).
It will be tough to show in this month's USDA report any type of change nearly
large enough to indicate a fundamental value change anywhere close to that
listed above. The question on everyone's mind is, how did the markets get so
out of hand?
We all have to wonder about the viability of the recent market, as the market
couldn't find a price high enough this summer it seemed for almost any
commodity. And now only 5 months later, it seems we can't find a price low
enough to find 'value' in these commodities. Is $40 crude oil low enough? $3
corn futures? $7 soybeans? $5 wheat?
While the commodities have melted away their values quickly (like an ice cube on
a hot day), the world has watched with pain and horror both the uptrend in the
commodities (especially crude) as well as the downtrend. There is littered in
the shadows some of the victims of the recent volatility, from Verasun Ethanol
to a number of risk managers and potentially a whale of other players as yet
unnamed (including small farmers, fertilizer dealers, and small traders) that
have been obliterated by the unprecedented volatility in the markets. While the
world should have had a fair warning about how volatile markets could get by the
past violent 2 year rally into July, the retreat was even more alarming and
fast, taking away over 2 years of rally in just 5 months. Left littered on the
gutters are those who couldn't foresee such a devastating decline in values in
such a short period of time.
Unfortunately, the list of those affected goes well beyond those poor managers
who didn't foresee the risk in markets, as 'Third Party Risk' is getting a whole
new definition by the year 2008! Players who had good contracts with previously
reputable businesses now find themselves on the short end of the stick, holding
$5, $6, and $7 corn cash contracts only to find they are printed on worthless
paper. While the sting of margin calls was a unpleasant thing for many growers
who did their own hedging, holding them yourself at least meant you were in
charge of your own destiny. If you lifted your own hedges rather than meet
margin calls, at least it was your choice. But to have your well planned sales
negated by something beyond your own control - that's just unacceptable.
There won't be any bailout for these victims of third party risk in this case,
as it doesn't have the high visibility of an AIG, Fannie Mae, Freddy Mac, or
Bear Stearns. But for those who are victims of third party risk in the Ag
Sector, the pain will be just as real and just as devastating.
To hold the line for someone else's error as some brave elevator managers are
doing is admirable, but you have to feel for these courageous individuals as
they eat the losses of someone else's poor management. Its too bad these brave
souls could not only get access to the $700 billion bailout to cover someone
else's errors, but also run the program for the government! We just might be in
need of such courage in the face of adversity!
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completeness, has been obtained from sources we believe to be
reliable. The opinions and recommendations contained are based on
our judgment and do not guarantee that 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
If you have questions about this column, call Progressive Ag at 1-800-450-1404,
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Grains have shown signs of bottoming, with an upside reversal Monday followed by strength today in front of the USDA December report tomorrow morning. Most expect the report to show larger ending stocks of corn, soybeans, and wheat for world and US stocks. But then the market has halved its price of virtually every commodity the past 5 months, so perhaps all that information is already in the market??? On the other hand, the downtrend is still very well established, and so far we haven't had a great deal of bullish news to reverse this trend.