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Bear spread debacle

Agriculture.com Staff 12/17/2007 @ 12:19pm

The wheat market took no prisoners last week, surging into new highs on old crop and buckling on the new crop. The rally's ferocity for front months scalped the bears and in particular the bear spreaders, who had been enjoying a profitable trade until about Thursday, when their world imploded.

There are plenty of questions as to why the dramatic shift in attitude, and it's certainly not just one thing. The fundamentals would suggest a bull spread stance. Old crop supplies only continue to get tighter and another round of demand showed up after Argentina halted their export registrations for at least a few weeks. And we finally got much needed moisture in the westcentral Plains, even if the driest regions only barely got enough to call it moisture.

USDA issued their monthly supply/demand report last week; they raised US exports by 25 million bushels and food use by another 5; taking wheat ending stocks down to just 280 million bushels, a 60-year low. No doubt that added to the old crop bullishness. World wheat figures were little changed. Argentina has yet to finalize the frost damage, and still has a halt on export registrations, at least until Dec 20.

Speaking of moisture, when we look at the spring Wheat Belt it's little wonder why Minneapolis has suddenly taken over leadership of the wheat complex. The Drought Monitor shows the entire spring Wheat Belt in a drought status heading into the winter. Spring wheat production had already been in a steady decline for the last few years, with current stocks matching historic lows; the dryness plaguing the northern Plains has the market in an ultra-sensitive state.

Informa issued their acreage estimates on Friday, projecting an 8.2% increase in winter wheat acres at 48.7 million acres, compared to last year's 45.0 million. They also swapped about 6 million acres from corn to soybeans; some of those acres will be double-cropped wheat/beans in the Midwest. Wheat acres around the world are higher again this year, and there is definitely potential for a huge increase in wheat production. But Mother Nature will have the final say, as is always the case.

The 2008 growing season is quickly approaching, with India first on the watch list, followed closely by North Africa. There are mounting concerns over the increasing dryness across India's wheat belt. Rains are needed quickly as the crop gets underway in January. This coming production season is obviously critical, and it all starts with India- who, by the way, started this whole bull market already two years ago with a short crop and subsequent imports for the first time in six years.

So, how does one maneuver through this turbulent market? Very carefully. It does seem like the right thing to do is sell at least the new crop months, particularly with the recent moisture in the Plains. However, it's a long way until harvest, and you have to respect the volatile nature of these kinds of markets, and keep the positions small and manageable.

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