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Grain trade slides on House bailout approval news

Members of the U.S. House of Representatives served up a bitter pill earlier this week when they rejected a federal bailout package to alleviate some of the country's severe economic woes.

But that deal was sweetened enough that by Friday, a revised version of the bailout, the Emergency Economic Stabilization Act of 2008 (H.R. 1424), was passed by a margin of 263 to 171. The Senate passed its version of the $700 billion-plus bailout -- that among other things raises the Federal Deposit Insurance Corporation (FDIC) cap for insured funds from $100,000 to $250,000 -- earlier this week.

"The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses," Federal Reserve chairman Ben Bernanke said Friday after the bill's passage. "The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy."

In addition to bumping the FDIC cap, the bill, according to the Independent Community Bankers Assocaition (ICBA):

  • Ensures community banks will have access to the Troubled Assets Relief Program (TARP) to sell problem mortgage assets;
  • Allows community banks to take losses against ordinary income for Fannie Mae and Freddie Mac preferred share losses;
  • Authorizes the Securities and Exchange Commission to suspend mark-to-market accounting rules;
  • Provides that TARP may be used to assist community banks that suffered the most serious impact to capital as a result of losses on Fannie and Freddie preferred stock;
  • Prohibits the Treasury from establishing future guarantee programs for money market mutual funds; and
  • Allows the Federal Reserve to pay interest on so-called bank "sterile reserves" beginning October 1, 2008, three years earlier than previously permitted.

Leading up to the House passage of the bill Friday, the overriding theory was that the bill's movement through Congress would be a bullish jolt to the grain trade. That didn't exactly happen as planned, according to floor trader and market analyst Vic Lespinasse.

"Many traders are perplexed that prices have sold off in the wake of the House passing the bailout bill. Most thought the market would rally after the bill passed but we are lower in the bean complex and only modestly higher in wheat and corn," he said late in Friday's CBOT trading session. "Grains defied traders' expectations, selling off to close mostly lower after the House passed the bail out bill. Beans led the way down, followed by the products."

"Corn futures traded in a hesitant nature on Friday for much of the day leading up to the House's passage of the $700 billion bailout bill by a vote of 263 to 171," added Allendale Inc. Market Analyst Joe Victor. "Immediately after the approval, futures gave back much of the day's gain from a need for technical short covering."

John Tocks, an independent CBOT soybean futures floor trader, says if the bill wasn't passed there might have been a panic that would have sent the grain markets even lower. "As it is, it's business as usual with the funds continuing their liquidation mode. So, let's watch and see if the funds take the markets down far enough to reach a support level or not," Tocks says.

Jason Ward, Northstar Commodity Investment Services, says the grain market is reacting negatively to the government's financial bailout package for no specific reason. "I'm not disappointed in the bailout package, but disappointed with the way the market reacted," Ward says. "The grains are caught in the undertoe of the financial sector, causing fund liquidation. A lot of funds are getting to the sidelines of this market to preserve capital."

Looking through this weekend and into next week, the bailout's passage is likely to become just one of a handful of market fundamentals weighing on the grain trade as others more typical of this time of year will take much of the market's focus.

"Next week, look for the trade to become more focused on the pace of harvest and begin the very earliest of stages transitioning from a production phase to the demand phase," Victor says.

"For opening ideas in the grains on Monday, watch the weekend weather...the forecast Monday morning, the direction of crude oil and the U.S. dollar Monday morning, plus any other developments in the financial markets," Lespinasse adds.

Ward adds, "Right now I'm negative on next week's grain market because not only did the grains sell off Friday, but the financial markets sold off as well. The 'big board' needs to stabilize."

Members of the U.S. House of Representatives served up a bitter pill earlier this week when they rejected a federal bailout package to alleviate some of the country's severe economic woes.

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