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Louise Gartner: Liquidation havoc

There is no rest for the weary bull -- if there are any left at this point. Not in grains, not in most of the commodity complex for that matter, as the liquidation of mostly hedge funds and index funds continued this week amid the crash in equity markets -- here in the US and abroad. The havoc in the financial markets spilled to the grain complex with so much uncertainty about credit availability for export business and about how much demand is being destroyed as major world economies slip into recession.

And as if grains didn't have enough troubles - bearish fundamentals for wheat and demand destruction for the row crops, heavy harvest pressure, fund liquidation, etc., USDA fanned the bearish fire with some additional negative news of their own.

Friday's supply/demand report was viewed bearish just about any way you could look at it. USDA found more soybean acres not only this year, but last year as well; in fact, 1.1 million more for last year and another 2.2 million this year. Corn acres were shaved just .1 million this year and unchanged from last year. Wheat's acres were shaved .5 million for this year.

Corn yields, however, were much better than expected with corn up 1.7 bpa to 154.0; soybeans were down .5 bpa to 39.5. Ending stocks for all three grains were higher than expected with beans up a big 85 million to 220 million, a much more comfortable level than just a month ago. Corn ending stocks at 1.154 billion were up 136 million and wheat at 601 million is almost double that of last year and a much comfortable level.

World wheat production was increased, again, another 4 MMT with most of the increase coming from Canada and the Black Sea, which offset a reduction in Argentina of .5 MMT. World ending stocks were also raised 4.5 MMT to 144 MMT, up 21% from last year and the highest since ‘05/06.

Despite all the world production and intense export competition, the US is still managing to put up respectable export sales figures. Last week's 565 TMT came despite not having one sale over 100 TMT, and after seeing the Black Sea step up their sales pace as their harvest hits the pipeline. The business was spread fairly evenly among the wheat types, and not the heavily loaded quality wheat we'd been seeing in many of the recent sales reports. Total commitments to date are 17.6 MMT, below last years 24 MMT at this point in the marketing year but still well above the 5-year average 15.8 MMT. Total export sales are 65% of the 27.2 MMT projectioned, compared to the 5-year average of 58%.

A quick look at the Southern Hemisphere shows Argentina ratcheting down their production prospects as the recent rains were simply too late to stop the yield slide. Argentine production will be about 12.0 MMT, 25% less than last year. Exports are expected to be 7.0 MMT, compared to 10.0 last year. Australia has seen spotty rains, helping some regions, but leaving others parched and looking at another bust. Nationwide, however, their production is still expected to be around 21.5 MMT according to USDA, down .5 from last month, but up from the last two devastating years of 13.0 and 10.6 MMT. Anecdotal reports from Australian producers themselves, however, would suggest that production will be lucky to be 20.0 MMT.

Australia is ready to recapture export business with Iran issuing a tender for 60 TMT of only Australian wheat. Their harvest is just around the corner and one would logically expect to see them be very aggressive with their sales, which would suggest that wheat prices could well see more pressure as we head into year's end.

Technically, wheat reached the downside targets and actually stabilized for three whole days before buckling once again with another gap lower right through the support level. For the Chicago Dec futures contract, Friday's gap lower quickly took us to the next support level of 5.63, the bottom of the range from last summer. How long that holds is anybody's guess, but gaps down are very bearish and portend more selling is on the way unless the market recovers quickly and moves above the gap level. The first thing we need to see is stability in the financial markets; from there, we can likely expect that forced fund liquidation is behind us and the insistent selling would be done.

From my perspective, it is important to remember that wheat is in a long term bear market. The characteristics of a bear market in wheat are basically what we've been witnessing the last several weeks --relentless selling with rallies hardly being recognizable. I still look at rallies, however we get them, as selling opportunities at least through the winter. I would expect to see wheat plantings this fall steady if not higher than last year, especially with the plentiful moisture in the plains. The crop is expected to enter dormancy in good condition, and that, too, will likely keep wheat prices in check as we head into the spring.

This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. Futures and options trading always involve risk of loss.

There is no rest for the weary bull -- if there are any left at this point. Not in grains, not in most of the commodity complex for that matter, as the liquidation of mostly hedge funds and index funds continued this week amid the crash in equity markets -- here in the US and abroad. The havoc in the financial markets spilled to the grain complex with so much uncertainty about credit availability for export business and about how much demand is being destroyed as major world economies slip into recession.

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