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Ray Grabanski: Reports, spring coming

As the sun rises on a Mid-March day, we await another USDA report which typically is full of dull news in March, but today may be slightly different as the world starts this March, 2011 with some very tight stocks and nervous buyers, as we move into the start of another production season.  With stocks very tight in corn and soybeans, and 

relatively tight in wheat and with a cotton market raging at all-time world history highs, it is indeed a worrisome situation for grain buyers.  

As the market report was out, slightly larger grain supplies and production in wheat and soybeans seem to be giving buyers some comfort this morning.  

These nervous grain buyers have driven the world's grain markets (and many other commodity markets) to near all-time highs this year, fighting for competing supplies of grains and realizing that, yes, they can spend that much for grain! There has to be some surprise at sticker price shock, but since this same event happened just 3 years ago is giving these buyers some comfort in buying at these price levels. 

So ethanol users continue to grind corn, even though that corn is now worth about $6.50-$7 cash on the market (although it might have been bought for a considerably lower average price).  A key question for these users is whether they can make more money by selling the corn than by crushing it through their plants.  It is likely that some managers are sharpening their pencils in calculating this out as this is written, and as another USDA report is being ground out.  

One has to only wonder how much longer we can go on with this market rally, especially given the current price levels.  While corn still has the appearance of a bull market (although arguably a tired bull market), the wheat and soybeans have shown a more tenuous situation, with prices sagging the past month in what might be the beginning of a bear market!  

These prices dropped sharply in early February, and since recovered about half of those losses, and then faded away again.  This is starting to look like a very tired wheat and soybean market.  

Cotton had the appearance of a market top just a few weeks ago, only to roar back and take out the previous highs as we expired the March contract.  Either the latest rally is just a rue (markets love to fake us out at previous highs), or indeed the cotton market has indeed such a tight stocks situation that no price will seem to be high enough.  Prices in the lead May contract actually locked limit up 700 points for 6 straight days, and finally traded off those highs to close limit down by the end of the trading day.  Is this really a top?  Or just another fake out in what is still a bull market?  

With the sheer emotion in cotton, it's likely the cotton market will be the first to form a market top, and we can simply take our cues from it, that once the it tops the grain will soon follow.  But remember, in 2008, wheat prices topped in February, while corn and soybeans waited until June to top.  It could take up to 4 months for the other 

grain/fiber markets to top after the first one does (which is likely to be cotton).  

It certainly is going to be an interesting spring, with grains and cotton likely to form multiple-year highs this spring at some point.  The key question (and worth way more than a million dollar question) is when? 

And by when, we mean not what month, and not what week, and not what day, and not what hour, but what minute that will happen.  It's likely we won't hit that exact moment for the highs, but it would be nice to get as close to that level as possible.  And one thing is for sure at market tops, it is likely to be the time when you least want to sell the market, that the market will actually top.  For cotton, for instance, that moment might have been when cotton traded limit up 700 points 6 days in a row (for a 42c gain to over $2.16?).  That is the moment when sellers will be most weary, and that is exactly when they will have to sell to get as close to the moment of truth of highest prices as possible.  Do we have the mental fortitude to do it?

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The information contained, while not guaranteed as to accuracy or  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 futures.

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