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Fundamentals matter too

The quick corn planting pace and improved weather have combined to take some of the shine off corn prices so far this week. By the end of trading on Thursday, corn prices were on the low end of their recent price range. Some analysts are already increasing corn yields in their supply/demand projections based on the improved conditions in many areas of the Corn Belt.

There was a first estimate of Kansas wheat yield released on Thursday afternoon. The Wheat Quality Council tour pegged Kansas wheat at 37.3 bushels/acre versus their estimate of 46.2 bushels/acre last year. Total wheat production is estimated to be down 100 million bushels at 319.2 million bushels, again compared to their estimate last year of 419.76 million bushels. The USDA final wheat crop numbers for last year were substantially lower, with the USDA yield at 40.0 bushels and the crop size at 380,000 bushels.

Why do "outside" markets matter so much?

By outside markets, most market participants mean the various energy and metals contracts. The first obvious reason is the relationship between fossil fuel sources of energy and the biorenewable sources of energy. The higher crude prices go, and the longer they stay high, the more people will look for alternatives and the more investment occurs to develop ethanol and biodiesel plants. The forecast increased use of these crops for fuel (versus feed and food) tightens the supply/demand situation.

The tie between energy, metals and grains also has an inflation component to it. While inflation is not currently a problem, the market wonders if it will soon rear its ugly head. It would be easier for prices of almost anything to drift higher in an inflationary environment.

We are also dealing with uncertainty. Of course, farmers and grain traders are used to uncertainty as far as weather, acreage, demand, etc. With the interest of a wider range of investors in commodities, as seen by the money flows to commodity index funds, uncertainty has a broader definition. The corn and soybean market is concerned with a broader range of "fundamentals" because the reasons for movements in evergy and metals must be considered on top of standard agricultural fundaments. Plus, how does this new class of investor deal with downturns? How long does this asset class remain popular and attract considerable media attention?

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.

The quick corn planting pace and improved weather have combined to take some of the shine off corn prices so far this week. By the end of trading on Thursday, corn prices were on the low end of their recent price range. Some analysts are already increasing corn yields in their supply/demand projections based on the improved conditions in many areas of the Corn Belt.

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