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A commodities sell-off

Grain markets have taken a few runs at the recent lows lately. On Wednesday, March corn traded at $5.80 and Jan soybean futures in the $10 range.  This is the third time we have taken a run at these price levels, and usually the third time is a charm for the market, when breaking through support.  As much as we hate to say support levels might be broken, this is one of those times!  

Fundamentals of the market continued to get worse when we received the USDA Dec report, which basically indicated that once again world stocks of grains became more plentiful, with larger crops in China (corn), Australia, and Canada. This once again meant a drop in projected exports and use of US grain.  That resulted in larger US and world carryout projections in the report, with the market providing some softness the day of the report, but prices rallying after the report was over.  What was most impressive about this rally is that it occurred with the outside markets showing price pressure, with stocks sharply lower and the dollar gaining sharply (now over 80 on the index).  But alas, the support was just a faáade, as we entered Wednesday's trading with grains coming under huge selling pressure (especially corn). The pressure from outside markets (especially metals and crude oil) mounted Wednesday in the marketplace.  Specifically, the gold values dropped below $1650 Wednesday, with silver losing 3% of its value and crude oil falling 5% of value (with a $5 break Wednesday).  

Something is amiss in the marketplace when the commodities all come under pressure. That something seems to be the European Union and the trouble expected from a eventual fallout of bank failures from this region.  While the US dealt with its problems when the Lehman Brothers failure occurred in 2008, perhaps the European devaluation is yet to occur yet in 2012? 

Commodity prices have recovered a long ways from our lows of 2009, and now they are starting to look like they might have a little 'bubble' appearance to them once again.  The air is coming out quickly in gold and silver, and now we are starting to see the air come out of the crude oil market, which rallied back from $30 in 2009 to near $100 last week -effectively retracing at least 60% of its loss from the $147 peak in 2008.  Cotton, gold, and silver all rallied to new highs in 2011, with corn also barely eclipsing its 2008 high as well.  But not all commodities were able to do that much - wheat and soybeans were significantly below their 2008 highs in 2011 at their highs.  But then again, all commodities don't need to follow the same pattern.

Corn yields in the US were the most disappointing of all the grains in 2011, with a 9% below trend yield vs. only 5% below trend for soybeans.  

So, there was solid fundamental reasons why corn prices spiked to their 2008 highs (and slightly above them), while the other grains couldn't muster up enough bullishness to do the same.  

Now, as commodities slowly let out 'air' underneath them, the market breathes a sigh of relief among buyers as they finally can feel more comfortable in their coming acquisitions this year.  Farmers are reluctant sellers, but it has to be discouraging to own grain that continues to depreciate - the exact opposite of the past few months.  

This might be a time where producers should consider defensive measures - protecting what price is still left for the 2011-2014 crops.  While the huge profit potential has been eliminated by recent price weakness, at least there is still some profit to be had.  And it still might be good advice from that old saying that "You can't go broke locking in a profit!"  


The information contained, while not guaranteed as to accuracy or  

completeness, has been obtained from sources we believe to be reliable. 

The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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