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Fundamental trading -- Ron and Sue Mortensen

12/09/2010 @ 2:33pm

It is refreshing to many traders that there has been a return to interest in grain fundamentals recently.  After the sharp break in November, traders and analysts realized there were still plenty of issues for the grain markets to deal with as the holiday season approaches and the countdown begins for the January 12th USDA reports.   

For the wheat market, there is the realization that there is not much high quality milling wheat in the world.  The latest victim of wet weather is Australia.  Quality has declined sharply and that country could end up with unprecedented amounts of feed wheat.  If the wet weather continues, some wheat could simply be abandoned.  What happens to the feed quality wheat?  Exports to Asia are likely, although it is not clear how this will all happen since Australia is not generally in the feed wheat business. 

Regarding next year’s wheat crop, the winterkill issues have begun to surface already.  A lack of snow cover in Russia has caused damage.  There may be concern about US Plains wheat (not in the best of shape going into the winter) and dry weather in Chinese wheat areas.  

For soybeans, the underlying issue right now is La Nina.  Growing areas in Argentina have seen just enough rain to keep the crops hanging on, but there is a constant worry the rain will stop.  The La Nina phenomenon often results in dry conditions for Argentina and southern Brazil, thus the concern.  By the way, rains in Brazil, including the southern states, have been good. 

The corn market on many days seems to trade the current opinion on whether or not the blenders’ credit will be extended into 2011.  The pace of current ethanol production is very strong--huge weekly statistics released yesterday were the primary reason corn futures rallied 13 cents.  Ethanol blending has been profitable to the blender and exports have been large.  The ethanol produced is well in excess of what is required by the RFS.  Therefore, there will be plenty of RIN’s around in 2011 in case ethanol economics go in the tank.   

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.  


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