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Financial market woes spill onto grains

Agriculture.com Staff 03/18/2008 @ 11:21am

Last week was another lesson in volatility, extremes and how deeply entrenched the funds are in the grain complex and how closely tied the agricultural commodities are not only to the other commodity markets, but also the equity and other financial markets.

Early in the week, several hedge funds were rumored to have been forced to liquidate because credit lines dried up and they couldn’t meet margin calls. Then later in the week, as the Bear Sterns news unfolded, more liquidation from funds in most markets ensued. Monday is bringing more of the same; massive liquidation in almost all markets led by investors' fears of 'who will be the next to fall' and decisions to pull money out of holdings.

Grain markets have not been spared the fallout, as even in the cash market commercials have had a great deal of difficulty financing cash contracts or fixed futures contracts because they can't cover cash purchases or meet margin calls. This has forced market risk back to the producers.

That said, there are actually some fundamentals in the wheat market that worth noting. The growing season is upon us in the southern and central Plains, with the usual dry spot of the far western regions. Last week saw some weather forecasts suggest rains on the way for those parched areas, and the weekend did bring traces of rain. However, most of the rains were forecast to come early this week, but now those forecasts are changing and suggesting the western regions will likely be missed for this round of showers.

This had little impact in the market, as the fund liquidation had far more bearing. But make no mistake weather will be the primary player when the financial dust settles. And while the western Plains is very important to overall wheat production, the outlook for the rest of the Plains is very good which could ease potential yield losses from the west.

USDA issued their monthly supply/demand report last week, sending some bullish news wheat’s way with rising export projections and food use, which took ending stocks down another 30 million bushels to an eye popping 242 million. Prices shot higher on the news, with some contracts posting new all-time highs. World stocks were raised just slightly on higher production out of India, which itself is questionable considering the hot and dry weather they had for most of their growing season.

No doubt the world needs a good wheat crop, and the acres are in to produce a record if Mother Nature cooperates. Therein lays the challenge: maneuvering through the minefield of stratospheric prices of old crop and tight supplies, a financial market in disarray, and the prospect of a wave of wheat coming into the pipeline in less than three months.

It's no simple task figuring all this out. Just when you think that maybe wheat prices had topped, they go soaring back to those highs or even higher – and that’s was before the growing season got underway. Then just as quickly, they plummeted back to their short-lived trading range of just two weeks ago. I still think the way to approach this wheat market is through the put options; futures are far too risky and weather is such a huge variable at this point.

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