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Ron and Sue Mortensen: Liquidation

02/25/2011 @ 7:59am

The markets have been hit with another substantial round of long liquidation this week, as traders sought to reduce risk in the face of the volatile situation in Libya and other Middle Eastern countries. 

Sharp rallies in crude oil prices and spreading destabilization around the world combine to make traders fear an economic slowdown.  The extreme volatility also argues for risk reduction, leading to traders reducing or eliminating various commodity bets. 

Grain fundamentals came in the form of the release of USDA Outlook Conference material.  This actually made pretty boring reading this morning.  USDA used the same acres for corn, soybeans and wheat in its updated supply/demand tables.  The only differences from a few weeks ago were small changes for rice and cotton.

This is the first time the USDA name has gone on supply/demand data for the upcoming crop year.  Using trend yields and conservative numbers for harvested acres, crop sizes become 13.7 billion bushels of corn and 3.345 billion bushels of soybeans.  Usage for both crops is very close to 2010-2011 levels.  This allows both corn and soybean carryout to increase slightly. 

Joe Glauber, the USDA economist, did say in his prepared remarks that it would be one to two years before the extreme tightness relaxed.  This argues for prices to continue to maintain a large risk premium—and it should continue until the key summer pollination/pod setting period. 

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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