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Blow-off top, or a bull market correction?

Grains have had an explosive week of price movement, with 62c gains in wheat
Monday (on synthetic options), 20c corn, and 10c soybeans. The markets followed this
upside explosion with 25c losses in wheat and 14c losses in corn/beans
yesterday. How's that for market volatility?

Whenever volatility explodes like that, usually we look for some type of topping
action in the market. While wheat can top anytime, we show we have high enough
prices to allocate out the short 2006 world crop. For corn and soybeans, harvest
would be an odd time to top these markets. Typically, harvest is when lows are
made in markets, not highs. Yet here we are Monday with the highest price of
the year for corn (higher than Aug 1, when the crop was at least 10 bu/acre
smaller than the crop is today!).

The explosion Monday was triggered by the same hot/dry weather in Australia over
the weekend that has plagued them all year. Weather forecasts weren't much
better, continuing to call for more hot/dry weather the next 2 weeks that pretty
much would seal the Australian crop's disastrous fate. Today weather forecasts
in Australia continue to call for only light rain in less than 10% of the wheat
area over the next week, and 20% coverage of light rain in week 2. Basically
more of the same hot/dry weather.

Argentina (the other growing wheat crop) is forecast to get good rain coverage
this week again, improving soil moisture and wheat prospects again for the third
straight week. So, while the Australian drought rages on, the Argentine drought
has effectively ended. This offsets part of the bullishness of the Australian
crop disaster, but certainly not all of it.

While the gains Monday were obviously overdone, still most grains (wheat, corn)
are higher for the week, with only soybeans dropping below Friday's closes as of
Tuesday evening. If markets close lower for the week, we might have a potential
top in the market, as we'd form a downside reversal for any market that finishes
lower (new recent highs Monday in all markets). That means an additional 6c
loss in corn could also indicate a potential top in the market.

For wheat, though, much more weakness needs to be shown than yesterday to form
that conclusion (especially CBOT old crop wheat). We do have some negative
technical formations in wheat with both KC and Mnpls Dec futures forming
downside reversals yesterday, but wheat is notorious for not following through
on such formations. Besides, Chicago Dec has clearly been the leader in this
rally, so we need a reversal there for the week to consider yesterday's trade-topping action. It will take 37c losses the rest of the week to push Chicago
Dec into a weekly downside reversal.

Note that new crop futures, however, look
like they might be turning the corner to lower with huge losses yesterday
(nearly limit down in KC and Chicago) as beneficial rains fell in 85% of wheat
country the past 2 days (.25-2.5", locally 2"). There's no doubt that US winter
wheat crops are in much better condition this fall than average (or last year).

From a technical standpoint, it's easy to draw a line in the sand for this week's
trade to answer the all-important question-is this a market top or a deep
correction in an emerging bull market? A lower close this week than Friday in
any market would spell trouble for that market. The most likely candidate today
is soybeans, with the USDA report possibly sealing the markets fate for the
week. If we form downside reversals in grains this week, it may be time to
advance sales of 2006-2008 wheat/corn at profitable levels of $3+ corn and
$4.50+ wheat. Soybean prices are too low for additional sales here - it would
be more profitable to just switch acres to wheat/corn than sell soybeans at
current price levels.

In US crop news, weather is turning cold/wet in the Corn Belt this mid-week, and
may delay harvest a bit (more in the eastern Corn Belt than western). In crop
progress reports yesterday, both corn and soybean conditions remained unchanged
at 62% G/E beans and 61% G/E corn. This indicates harvest yields are about as
expected. Yet, we hear both corn and soybeans in the western Corn Belt are
better than expected (in many cases 20% better than expected), so eastern corn
belt areas might be slightly disappointing.

Sorghum crop conditions declined 3%
(to 29% G/E) with warm/dry weather last week; however cool/wet weather is the
rule this week. Soybeans are 47% harvested (equal to normal) while corn is 29%
harvested, 3% behind normal so harvest for the most part is on schedule (there
will be some delay's this week). Winter wheat is 69% planted, only 1% behind
normal while 37% is emerged vs 41% normal.

Planting is beginning to 'catch up'
to normal here, too, with the drying weather last week. It has mostly been too
wet on topsoil for the western winter wheat area, so this week's rains might
delay them further as they try to finish planting this week. Drier eastern
areas (TX, OK) welcomed the rain, and it will help germinate wheat in their
drier soils where planting is likely more advanced.

Given all the crop conditions and weather news this week, perhaps in the end the
USDA report Thursday morning will be more telling than usual. It likely will
include further tightening of world and major exporter wheat stocks with major
cuts in Australian production. But, it also may hold some bearish surprises in
corn and soybeans (higher yields and possibly higher harvested acreage). We
could have a record large soybean yield by January, but whether or not USDA will
hike yields that far in this report (beyond 43.3 bu/acre, last year's record)
from 41.8 bu is still a question mark.

Lately, funds have bought grains
indiscriminately. So, perhaps price movement through Friday will give us
a clue about their behavior after the report (Do they buy everything, just
wheat, or nothing going forward?).

Grains have had an explosive week of price movement, with 62c gains in wheat Monday (on synthetic options), 20c corn, and 10c soybeans. The markets followed this upside explosion with 25c losses in wheat and 14c losses in corn/beans yesterday. How's that for market volatility?

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