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Spreads attract attention

Agriculture.com Staff 04/20/2007 @ 7:40am

Sometimes the spreads are more volatile than the outright commodity price. The recent action in the old crop/new crop corn spread illustrates that concept. Improved export interest, more competitive prices (compared with Argentina) and reduced farmer selling have all combined as fundamental reasons for a rally.

The disaster in many areas of the wheat belt has been a strong influence as well. There are estimates of a smaller crop and some may be worried about having wheat available for feeding. The wheat/corn spread definitely says "feed corn" versus earlier thoughts of increased wheat feeding. Of course, the opposite side of the discussion is that freeze damaged wheat may mean more feed quality wheat, versus high quality milling wheat.

Don't forget the freeze damage to many fields of southern corn. Planted very early, many had hoped this would supply feed needs in August and September before the main harvest of corn begins. Even if these fields are re-planted to corn, the early supply is lost.

Every bushel of new crop wheat and new crop corn that is lost makes old crop supplies more valuable. It's the "bird in the hand is worth two in the bush" concept that physical supplies are sometimes viewed as more valuable than supplies that are still in the ground.

Finally, there is the discussion of the role of the speculative trader. The bear spread (buying a deferred contract while selling a nearby contract) has been a common trade to put on since the strong market in January and February. The bear spread continued to be a popular move as traders became concerned that planting 90 million acres of corn might not go well.

This week, improved planting weather has given the market more confidence that the corn will go in the ground without serious delays. The unwinding of these spreads and other outright buying of May and July corn futures contracts has caused these spreads to change by 16-17 cents. May options expire tomorrow which also may be exaggerating the rally in May as traders cover sold calls that are suddenly unprofitable.

Sometimes the spreads are more volatile than the outright commodity price. The recent action in the old crop/new crop corn spread illustrates that concept. Improved export interest, more competitive prices (compared with Argentina) and reduced farmer selling have all combined as fundamental reasons for a rally.

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