The Real Reason Why Corn, Beans & Wheat Prices Have Fallen
Nov 16, 2010
Below is an excerpt from my Free Farm Direction Newsletter that I sent out Sunday night to all of my followers. I thought it would help you better understand why prices have fallen so drastically as of late. If you are not getting my information each day make sure you sing up by clicking the link below. It comes to you via e-mail and their is no cost and no obligation. As always, hope you find the info helpful.
Farm Direction Daily: I know many of your are very concerned about the price action of Corn, Beans and Wheat, especially after Friday's limit down moves. I wanted to give you a little more behind the scenes look and an update on how things are developing.
If anyone of you doubted the power of the "outside markets" and or the importance of China in the grand scheme of this things, let Friday be proof that right now, they are the markets. China simply throws out a rumor that they are going to raise interest rates to cool inflationary price and the commodity markets fall apart. Yes China has the market running amuck, but there is something else brewing in the background that I want you to be aware of. Not many are talking about it yet, but it could put more pressure on the markets during the next few weeks. I talked to a few of the big boys this weekend and there is some fear in the air that the Euro could eventually fall apart. More debt problems for Ireland, Portugal, Spain and Greece could mean bigger problems on the horizon for the Euro. What does this mean for the grain market? It's not just the grain market, but rather all commodity markets could feel the effect. To put it in simple terms, if the Euro collapses you have to assume fund managers who have been shorting the US Dollar and buying commodities would be in real trouble. Many would be forced to unwind or jump out of the Euro as it collapses. More than likely they were short the US Dollar and Long the Euro to begin with. As they unwind their spreads they would be big buyers of the US Dollar ultimately driving the value of the Dollar much higher. Global traders who have also made similar plays spreading the Euro against other currencies would find themselves in a similar situation and would more than likely seek refuge in the US dollar as well. This would force those traders who are Short the US Dollar and long commodities to run for the exit door as the trade unwinds. Essentially they would be buying back their short US dollar positions and Selling their long commodity positions, cashing in their winning chips and saying "game over". Do I think this will happen? No, but I need you to be aware of it and understand how this game is being played. There is a lot more to it than simple supply and demand numbers now a days. You have to see the entire picture. I don't think it will happen because the US simply can't afford for it to happen, we will throw the entire kitchen sink at this thing before we allow massive "deflation" to take it all down the tubes. This is why the Fed is so worried, this is why the Fed wants to make sure they have the resources in place and available to step in and prevent such an issue. If I am wrong and the entire "house-of-cards" comes tumbling down the commodity markets will get rocked across the board. If the funds were to exit in mass, rest assured the board will bleed for several days. Limit down would be the theme to say the least. Do I think prices would stay there, absolutely not! The Chinese consumer does not eat less based on what the funds do or what the Euro does. Global demand is on the rise and it will soon be a freight train running out of control. The only way to slow inflation will be for countries to import more food and raw material, there is no other way around it. We are on the verge of an explosive move higher. Could we break lower at some point due to outside circumstances? Certainly. I just want you to understand how delicate and volatile this game has become. Take calculated risk, reward the market with small cash sales on moves to higher ground. Don't get greedy, never think of it as sure thing or let anyone tell you that it is, and most of all do net get overextended. Always keep in the back of your mind that we could see several days of limit down action if the funds are ever flushed or spooked out of their current positions. Yes we will more than likely rebound, but you have to be able to hold your positions, your hedges and your cash to survive.
On the bright side, there were no interest rate hikes this weekend in China. I also heard that when they wrapped up the G-20 meeting China committed to gradually take action, nothing drastic was in order. Basically China has accomplished exactly what they wanted...cheaper prices. By releasing the highest inflation numbers of the decade the exchanges scrambled to raise margins and many funds and specs were blown out of their long positions. In the end this only confirms what we thought all along. China simply can not supply enough food and raw material to keep their prices down. In the end they will have to import huge quanities to control prices and inflation. An interesting point to mention is that the open interest really didn't fall that much on the mass exiting. This simply confirms my belief that the funds and spec's are simply bailing out and the commercials and end users are buying. We should open higher, and hopefully we can hold onto the gains. It wouldn't surprise me though to see the usual three day exiting patterns by the funds come into play and ultimate take us back lower for a few more days before we stabilize and turn this thing around for another surge. Lower prices are not going to ration demand, nor are they going to buy acres. Remember bull markets somehow always find a few ways to let you in…