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.