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Wheat becomes the leader

07/22/2010 @ 11:00pm

With the concept of a hot dome fading from memory, the market is currently struggling with the improved situation in the United States and the ongoing serious drought in areas of eastern Europe and the former Soviet Union.  Areas of concern include Russia, Kazahkstan and Ukraine.  Crops affected include wheat and many types of coarse grains.   

It is hard for prices to move independently of one another.  Therefore, rallies in wheat often cause rallies in corn and soybeans.  Some sort of price relationships need to be maintained in the long term. 

In a short term timeframe, much is possible.  Thus concerns about the world wheat crop size can cause sharp rallies in wheat prices˜up $1.50 since the middle of June.  At the same time, the premium that wheat commands versus corn has gone from $1.15 to $2.37 (using December contract prices).

In the long term, market participants will seek to correct these extremes.  For example, for next crop year, wheat farmers will likely plant more acres, to take advantage of the significant price rally.  More 2011 wheat acres means possibly less corn acres.  Future corn prices will have to remain strong to hold on to acres.  

Farmers in South America will also have a green light to plant corn and soybeans (wheat is already basically in the ground).  But both Argentina and Brazil can grow and export significant amounts of corn˜Argentina and Brazil are the second and third largest exporters of corn.  

US exports will also change and this process could start relatively soon.  The US could see greatly improved possibilities for wheat exports, as cheap Black Sea feed wheat becomes less available and higher priced.  Because the amount of world feed ingredients is declining, US corn exports could be larger.  Soybean or meal exports could also rise, again due to a shrinking pool of feed ingredients.

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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