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February 2011 Archive for Current Marketing Thoughts

RSS By: Kevin Van Trump, AgWeb.com

Kevin Van Trump has over 20 years of experience in the grain and livestock industry.

Grains Make a NIce Rally and More Production Problems Out of China

Feb 25, 2011

 Wild day today with corn going limit up one time and finishing strong.  Beans and wheat both finished up big as well.  Obviously the big news today, the trade put a lid on crude oil as Saudi Arabia announced they are going to up production to make up for shortages do to production problems in Libya and other parts of the Middle East.  USDA export sales were higher than expected for corn and wheat with beans still lagging behind.  Of course this morning the USDA did flash news that China stepped in and bought 165,000 tons of soybeans.  I did want to catch you folks up on some possible production issues that are now being released out of China.

 

 

MUST READ...China's Years Of Pollution Could Actually Cost Them A Huge Portion Of Their Crop

China's poor farming practices and years of polluting their land may have finally caught up with them.  The news is just starting to surface, but from what I was told last night millions of acres of Chinese farmland could actually be polluted with heavy metals.  The Chinese government may have actually know of the problem since 2007, but have been able to keep a tight lid on things until now.  Sources claim that 12 million tons of grain may actually need to be destroyed or may have already been destroyed in the past few months.  The story circulating is that China had been pressed to build massive irrigations systems several years back to eliminate ongoing drought issues.  The land and water sources where the water was pulled from was later found to be highly polluted with heavy metals and other toxic substance.  The authorities, at all levels, have tried to hide the problem even though cases of pollution and pollution-related diseases, above all in children, have been breaking out like wildfire.  There have been documents uncovered that former Land Minister Sun Wensheng warned the government in 2007 that at least 10% of China's 295 million acres of farmland were actually contaminated by heavy metals, toxic pollutants, and cancer-causing cadmium.  Prime Minister Wen Jiabao and Environment Minister Zhou Shengxian were put on the spot and have promised to start some type of clean-up campaigns after admitting that metal poisoning had become much worse than they had ever anticipated.  Supposedly the Environment Ministry, yesterday announced on its website a plan to tackle pollution in 14 heavily affected provinces.  However, in typical Chinese political fashion it refused to provide any details about how much damage and how extensive the problem has become.  The plan and details of the problem are still being considered a national secret.  If this is true it could certainly be the "smoking gun" that China has been trying to cover up, and could ultimately let the cat out of the bag.  If it hasn't happened yet, I can almost guarantee you China's poor environmental practices will ultimately catch up with them.  

 
If you are not getting my free report make sure you get singed up by following the link below.  I will also be hosting a Special 1-Day Marketing Seminar in Kansas City on Saturday March 19th. If you are interested in attending please call our office for specific details and to reserve a seat (816) 322-5300.
 

 

Why the Funds are Exiting Corn and Beans

Feb 24, 2011

 

Why Corn & Soybean Prices Are Not Moving Higher
 
I wanted to take a quick second and help the producers understand why Corn and Soybean prices are not moving higher with Crude Oil. 
 
What is happening is the large traders are obviously fearful that the political unrest in the Middle East and Northern Africa could eventually spill into some of the more prominent oil producing OPEC Nations causing crude oil production to slow or in some cases even be halted.  As traders become more nervous of such an event becoming a reality crude oil prices continue to push higher. 
 
The big boys are taking that one step further and are worried that rising crude oil costs could potentially hit the global economies like a ton of bricks (very similar to 2008), throwing several of the world's leading economies into a massive tailspin.  
 
The fear is that we could eventually see a rally similar to that of when Iraq invaded Kuwait.  A rally of that magnitude would push crude oil prices towards $200 a barrel, leaving US consumers to deal with $5-$6 per gallon gasoline.  You do not need me to tell you what that would do to our economy or the other leading economies in the world.  Consumers would once again hunker down as a majority of their expendable cash would be going into their gas tanks.  
 
Understand this, if the economies falter, demand will come to an immediate halt, and the big commodity party will once again be over.  Do I think this will happen?  No, but it doesn't have to happen to become a real reality.  If traders think for a minute that Saudi Arabia or Iran's crude oil production could be shut down or is in jeopardy the price of oil will skyrocket causing their worst fears to become a reality.  
 
Unfortunately for you and I it could turn our worst fears into a reality as well.  If the funds get worried about the global economies, and whether or not they will be able to handle the weight of $150 crude oil, you can rest assured we will be in for a massive set-back in grain and livestock prices as the big boys take the "risk" trade off the board.  
 
I love the grain story more than anyone, and I remain bullish, but if things don't simmer down quickly in the Middle East it may be a long road back to new highs. 
 
Make sure you are receiving my daily e-mail and all of my market commentary.  We have been rewarding the rallies with some small cash sales along the way and have thrown out some strategies you can use to protect yourself.  Keep working with your advisors to have at least a small portion of your "new crop" protected.  These prices are just too good and the markets are too volatile right now not to be following a good plan.
 
If you are not getting my free report make sure you get singed up by following the link below.  I will also be hosting a Special 1-Day Marketing Seminar in Kansas City on Saturday March 19th. If you are interested in attending please call our office for specific details and to reserve a seat (816) 322-5300.
 

 

Why the Grain Markets are "Limit Down"

Feb 22, 2011

I just wanted to update the producers who are trying to figure out why the Grain Markets are "Limit Down."  We started out in the overnights trading higher following crude oil, then a few major events spooked the big boys and we have since broke $0.50 in corn, over $0.80 in soybeans, over $0.70 in wheat and massively in cotton. 

It started with several Fund traders becoming extremely nervous and uncertain about the recent political unrest and turmoil in Northern Africa and the Middle East.  When traders are uncertain they tend to take risk off the table and move to the sideline.  That is exactly what we are seeing in today's trade, and what I wrote about in my morning e-mail.  I hope you had the chance to read it. 

To add fuel to the fire, I reported that the rumors are the Chinese government will "NOT" reduce soy import tariffs.  As expected this may have simply been a strategy by the Chinese to invoke more farmer selling and less hoarding.  I doubt we have heard the last of the "tariff" story, but for now it looks to be off the table.  Also adding pressure to the grain markets is word out of Russia that they will be selling feed grain at a reduced rate from their intervention stocks.  There are some additional comments circulating that Brazils soybean crop may actually come in much higher than expected (closer to 72 or 73 million metric tons). 

As for cottons big break I heard the trade had a few merchants caught short the March contract and they couldn't make their cash deliveries against their positions.  They were trapped, couldn't roll forward and couldn't deliver.  This forced them to bite the bullet late last week and buy back the positions causing the market to run limit-up last week, now the market is correcting in a big bad way. 

Until the big boys are more comfortable with the "outside" markets and the uncertainties that are surrounding Northern Africa and the Middle East, risk reduction could be the theme.  Nothing has really fundamentally changed within the grain markets themselves, except for the fact the big boys are fearful of what could happen in the Middle East and they want to take their chips off of the table.

Hope you have been following my cash sales recommendations and taking a few shots on the recent rallies.  I will not be making any additional cash sales in this environment, rather looking for extreme breaks to re-establish or build longer-term bullish positions.  Make sure you are buckled in, this ride could get wild.

 

 
If you are not getting my free report make sure you get singed up by following the link below.  I will also be hosting a Special 1-Day Marketing Seminar in Kansas City on Saturday March 19th. If you are interested in attending please call our office for specific details and to reserve a seat (816) 322-5300.
 
 

 

My Opinion Of Why The Markets Dropped on Friday

Feb 19, 2011

I have been in Louisville all week at the National Farm & Equipment Show, and was bombarded with questions yesterday about why the markets broke so hard Friday.

It seems most analyst wanted to blame it exclusively on China cutting their reserve rates, but there may be a little more to it than that.  

IF you remember on Thursday the markets rejoiced on news that China's Ministry of Commerce was asking others inside the Chinese government to consider potential cuts in import taxes on a variety of agriculture markets.

The story out of China is that they are hoping to encourage imports from other nations. Let's hope that is actually their motives. Consider the following.
 
From what I could gather they are talking about lowering bean oil duties from 9% down to 5%, lowering soybean duties down to 1%, etc.., etc... This would certainly make it more profitable to import grains and help China build back up their inventories.  
 
The market responded in great cheer on thoughts that more US beans, corn, and wheat will be exported to China.  I hate to play devil's advocate, but something just doesn't seem right.  Rarely does China make this type of "general" statement with no direct action or specifics.  What if China's underlying intention from this announcement is to spook their domestic producers into selling their corn, beans and wheat ASAP... before the onslaught of imports flood their country.
 
Essentially they kill two birds with one stone.  They lower their domestic soybean prices on news of greater supplies hitting the ground (in the short-term), and they scare the hell out of their own farmers forcing them to panic and make sales immediately (which could cause some short-term pressure on the markets).  
 
Those of you who follow my daily newsletter know that I have been reporting on massive farmer hoarding problems in China for sometime, and in particular how the Chinese government has become very frustrated because the farmers have been reluctant to sell them their grain.  As a farmer you can imagine how you might feel if the US government announced they were wanting to open up the flood gates in order to start importing massive amounts of corn, beans, and wheat from South America, in turn flooding our domestic market with massive supply.  I am sure this announcement will hit home in a hard way with many of the Chinese farmers, and I would have to imagine they may quickly start selling more grain.  This could initially cause a wave of selling and drive prices lower, ultimately though it flushes more supplies from the farmers hands and brings China just one step-closer to one solution "importing massive amounts."  
 
It certainly makes you stop and think about the Chinese motives and if it will spark a new wave of domestic selling, that in the short-term could pressure their domestic prices and provide them with enough supply to squeeze by for a little longer... Certainly something to think about.  
 
If the move however proves to be genuine, China will join the ranks of other countries who have been forced to cut import duties in order to battle domestic food inflation.  I have even heard Taiwan is now thinking about cutting their "sales tax" on food such as corn, beans and wheat to help cut consumer cost.  
 
They can play all the games they want, ultimately they are going to run out of short-term options and will have no choice but to import massive amounts of grain...the question is how long can they continue to hold out?   
 
If you are not getting my free report make sure you get singed up by following the link below.  I will also be hosting a Special 1-Day Marketing Seminar in Kansas City on Saturday March 19th. If you are interested in attending please call our office for specific details and to reserve a seat (816) 322-5300.
 

Argentine Port Strike Supposedly Back On

Feb 17, 2011

 

The latest news I’m hearing from Argentina is that trade unions and grains exporters met for last-ditch wage talks on Wednesday afternoon, no resolution was made and the strike is back on.  If you remember we talked about this on Feb. 2nd when workers at grain ports and soy-crushing plants in Rosario suspended their week-long strike after the government ordered both sides to take a break in order to resolve a dispute that delayed shipments and stoked global prices in the grain markets.  From what I hear from guys on the ground is that nothing has changed.  Basically the negotiations center around grain handlers and dock workers that are wanting a raise in minimum wage to $1,202 a month, equal to what the soy-crushers are earning.  Inflation is hitting them deep in the pockets and they are struggling with being able to meet the rising prices.  If demands aren’t met soon this could send the markets for another ride.  Let’s not forget that last time workers managed to bring crushing plants and ports to a standstill for seven days and the markets reacted with a move to higher ground.  This damage sent a shockwave through the markets and caused multi-million dollar losses for end-users alike.  We will definitely keep an eye on this as it unfolds.  Look for problems of this nature to start popping up more and more as countries all over the world are dealing with actual inflation that could provide fuel for more strikes.
 

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Washington Looks to Cut Funding for Wheat Research?

Feb 14, 2011

 

I am told that wheat growers, researchers, millers and bakers were all in the Nations Capital this past week trying to convince members of Congress not to cut funding for wheat research.  You have to believe their timing has been impeccable, considering wheat has been the crux of the Middle-Eastern riots.  Congress is certainly getting a first hand look at just how important farming and agriculture can be to a country.  As I have mentioned in previous reports funding for USDA programs including wheat research is under heavy scrutiny and in jeopardy of being cut.  You have to remember, Federal government spending on wheat research is considered "discretionary-spending," the type most targeted for cuts by the House Budget Committee.  Wheat is vital to the U.S. and world economy and for food security.  What they have to remember is that wheat exports alone contributed almost $6 billion dollars to the US economy last year.  That doesn't count all of the additional billions in revenue generated from items containing wheat domestically.  What I found amazing was the fact that agriculture research funding for the past 20 years has remained unchanged, while revenue generated, expenses for salaries and new technology have soared.  Like those supporting the Wheat industry in DC, I wanted to voice my support for the cause as I understand how important it is for wheat research to continue to receive this funding.  I believe it is critical that here in the US we continue to have access to an abundant and affordable wheat supply.  There are certainly many other government programs that can can be cut prior to one that produces massive amounts of revenue and is instrumental in keeping our families fed.  I have been told that trying to produce a new variety could take close to an entire decade.  Finding new innovative ways to fight disease and pest inside the crop and better ways to plant, harvest and deliver the grain to the mills is essential.  For years we spent millions teaching the rest of the world how to farm and ways to improve their production, now your telling me we can't afford to keep advancing the ball here at home... Somebody has to be nuts!  I am all for reduced government spending, but I don't think this is where you start.  Let's hope those who have been voted in can come to some sensible conclusion. 
 

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Read Before You Hedge More Fuel

Feb 11, 2011

 

I have had a few calls as of late regarding when and how to lock in your fuel cost.  Several producers I have spoken with stated they have never had much luck with using "Heating Oil" to hedge their diesel needs and were wanting to test their hands in "crude oil."  This hedge was of course recommended by their advisor.  I also spoke with several of our speculators who are also considering crude oil and have called in to confirm information their brokers or advisors were telling them about making a play in the Energy "crack spreads."  They are being told that the crack spreads have traded out to a record level and are screaming that it should be taken advantage of.  I strongly urge you not to listen to this advise and stay on the sidelines, do not get pulled into this mess.  I can not guarantee it, but from what I hear, there is a massive "inside job" taking place.  This is certainly larger than you and I, and something that I promise, you want no part of.  To bring everyone up to speed you have to first understand all of the variables.  To start, let's look at the "crack spread."  The crack spread is an indication of the profit margin available from refining crude oil, and is best defined as the price of two gasoline futures contracts, plus one heating oil futures contract, minus three WTI crude oil futures contracts.  Essentially traders will go long (2) Unleaded Gasoline contracts, long (1) Heating Oil contract and off-set it all against (3) short WTI Crude Oil contracts.  However, as of late, the "crack spread" has been surging to extreme levels.  In normal conditions, the increased crack spreads' premium would signal that refiners are making big profits by buying oil relatively cheaply and then processing it into expensive fuel (gasoline and heating oil).  What everyone is failing to notice is that the price refiners are paying for their oil is much more than Nymex "WTI" crude oil futures contracts are suggesting.  This means the big profits seen in the crack spreads are all just smoke and mirrors. One of the main reasons the spread has gotten out of whack is because of the games that are being played with the Nymex West Texas Intermediate (WTI) crude oil contracts.  You need to understand that "West Texas Intermediate" (WTI) crude oil is of very high quality.  Its API gravity is 39.6 degrees, which makes it a "light" crude oil, it also only contains about 0.24 percent sulfur, which makes it a "sweet" crude oil.  On the flip side the Brent Crude Oil Blend is actually a combination of crude oil from fifteen different oil fields located in the North Sea.  It is still a "light" crude oil, but not quite as "light" as WTI, and it contains about 0.37 percent of sulfur (making it a "sweet" crude oil, but again slightly less "sweet" than WTI).  As you can imagine, WTI crude oil should be more expensive then Brent Crude Oil.  Right now, that is not the case.  In fact, Brent crude oil has traded out to an almost $17 premium to WTI crude oil as of late.  It is my belief that some type of major market manipulation is underway, and the recent political tensions in the Middle-East has given them an opportunity to make their move.  Think about it this way, our US gasoline inventories are reported at the highest level since March 1990 (yet gas prices are going through the roof) and our "distillate" inventories (which include heating oil and diesel fuel) are even more burdensome.  All at a time when prices at the pump are surging, and WTI crude oil prices are falling.  How is it that crude is falling but Gasoline is surging?  Something doesn't add up.  I am telling you now the refineries are not making huge profits as you might be lead to believe, instead they are being forced to buy the much more expensive Brent crude oil, leaving the WTI contract out in the cold.  The massive divergence in price the past three weeks has wreaked havoc on energy investors, traders, fund mangers, etc...  If you dig deep enough, I believe we can trace it all back to 2009 when Saudi Arabia, out of the blue decided to drop WTI crude oil as its benchmark for pricing oil to US customers.  The Saudi's claimed they wanted to shift away from the WTI contract because there were too many speculative swings.  In hindsight, that was all one big lie.  Remember, WTI crude oil is the world’s most liquid oil futures contract, for years has been called the only "real" price of oil.  Within the past two years, the Suadi's have convinced others, such as Hugo Chavez to join their campaign and drop the WTI benchmark for sales of crude oil to America.  In its place they started using what is called "Argus Sour Crude Index" (ASCI), which measures heavier oil with higher sulfur content (in essence crappy crude oil).  There is no debating the fact that Argus Sour Crude is inferior to WTI crude, and should always trade at a discount.  Well it is not, in fact it is trading significantly higher than WTI crude.  This essentially means the US is allowing Saudi Arabia, Venezuela and a handful of others to sell us here in the US an inferior product while we pay a premium price for the "crap" Argus and Brent crude blends, while the Saudi's and others turn right around and sell their quality crude for a massive premium to China and select areas of Europe.  I am not exactly sure why we are allowing this to happen, but I am sure we know what is going on and in some way, shape or form have orchestrated the move.  I don't want to believe this but, I am starting to hear rumors that the US has strategically placed the WTI inventories and stocks in Cushing, Oklahoma in order to make supplies tougher to get from the coast, this encourages refineries to use the Brent or Argus blends rather than the WTI.  This means inventories of WTI build and prices drop.  These WTI prices are then used to calculate inflation rates and other government data here in the US.  All the while we are paying more at the pumps and refineries are paying more for the imports and to the Oil gods in the Middle-East.  We are feeling the pain, but the government continues to point to data that shows figures on inflation not really rising by using the WTI crude oil prices.  Nothing in the numbers reflect the recent prices of Argus or Brent Crude, the real benchmark prices being paid.  I would not encourage my worst enemy to get caught up in this mess or to jump in any type of trade right now in WTI Crude Oil, something is just not right.  I have learned a long time ago if it looks like a duck, walks like a duck, you know the rest....then it is a duck! 

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Why The Chinese Drought Could Be So Important...Read All To Understand!

Feb 09, 2011

 

The bulls in the wheat market seem to be licking their chops in regards to further confirmation of one of the worst droughts in the past 60 years.  Yesterday the U.N. Food and Agriculture Organization stoked the flames by issuing a "special alert" due to a severe drought that is threatening the major wheat producing areas of China.  Shortages of rainfall are starting to adversely affect people, grains and livestock.  The F.A.O. believes that close to 13 million acres of China’s wheat fields are in some type of jeopardy due to the recent drought or lack of snow coverage.  They have also estimated that well over 2.5 million people and closer to 3 million head of livestock are facing extreme water shortages.  The fear now is that if the drought continues and or temps begin to fall the situation could be devastating.  Rumors right now in China are that President Hu Jintao and Prime Minister Wen Jiabao have made trips to the drought stricken areas and have now called for "all-out efforts" to cope with the water shortages.  To deal with such problems the government has allocated $15 billion to support farmers, increase irrigation, subsidize fertilizer, pesticides and fuel.  Those on the ground are telling our sources that in many areas the ground is so dry that trees and houses are coated with topsoil that has blown off parched fields.  The obvious question is how will this impact the US?  With all the secrecy that surrounds China’s agriculture production it is difficult to know for sure.  What we do know is that China’s wheat industry accounts for more than one-sixth of all global production, and while China has been known to shut itself off from the world, if they are forced to import wheat in any major capacity wheat prices in the US will skyrocket.  Most of my loyal followers will be quick to point out that China's wheat crop is around 80% irrigated, and that this is not that unusual to see long periods of dry weather this time of the year in China, therefore this may not turn out to be such a significant ordeal.  I urge you this time around not to be so quick at coming to this conclusion and that you may want to reconsider  taking this one step further.  Let's assume the drought doesn't absolutely destroy the Chinese wheat crop and that it makes it through the dry period producing satisfactory yields.  Along the way however countries in the Middle East become spooked or nervous about all of the news and fear surrounding the Chinese drought.  They are worried that if China is forced to import wheat it could leave them empty handed.  I am certain with the political tensions flaring and food inflation skyrocketing, being left with little or no grain is not an option.  To completely avoid the possibilities, countries at risk might be forced out of the game as the stakes are raised.  Those who have been waiting for a pull-back may be forced to jump on board "now" rather than taking their chances of battling it out with China for the wheat. Understand the drought itself may not have to cause major damage to the crop to significantly rally prices.  Please don't look past this, it is a major deal so don't let others tell you it is not. 
 

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Argentina Inflation Could Ultimately Result In Higher Demand For US Grains

Feb 07, 2011

 

Inflation is rising so fast in Argentina the locals are starting to get restless...  The word I am hearing is that inflation in Argentina is running close to 30% right now.  The middle and upper class are using credit cards at a record pace, while the lower class are now struggling to pay for food.  There are whispers in the air about "hyperinflation", and many are calling into question the success and efforts of President Cristina Fernández de Kirchner, who will be trying to seek re-election in October.  You can already see where I am going with this.  How long before those in Argentina start to protest and demand changes and or solutions.  What if "hyperinflation" is the case in Argentina, what if they need all of their inventory and current crops in order to keep a lid on prices domestically.  What if they were to strictly limit exports of soybeans, corn and wheat?  I think we are already seeing this as the government has limited the amount of wheat they are allowing farmers to export, and farmers are threatening to strike because of the mandates.  Argentina may quickly find themselves in a very precarious situation.  Their government continues to underreport and manipulate inflationary data and now things are starting to finally catch up with them.  The manipulation of the statistics has drastically increased Argentina’s risk profile, driven away foreign investors and complicated the country’s efforts to return to the credit markets.  The word is paychecks and salaries have increased 20% per year the past few years and still can not keep pace with inflation.  In 2010, Argentina's people actually purchased fewer units of beverages, fruits and vegetables, a sign that inflation is finally taking hold and is starting to strangle out their economy.  Now that paychecks are no longer keeping pace with food prices more individuals have been forced to turn to credit cards.  Data actually shows that credit card debt in Argentina rose by 45% this November compared to last November.  Inflation in Argentina may have finally reached a "tipping point."  If the government doesn't do something soon I anticipate their citizens will start demand changes.  If the protest cripples the country you could certainly see the world leaning more on the US for their grains.
 

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Don't Get Fooled Like I Did

Feb 02, 2011

 Here's one story from today's report that I had written in response to a couple of customers' questions about this coming storm.  Hope it helps!

 
I remember when I first started trading and a massive winter storm was set to rip through the mid-west, I let a fellow trader talk me into getting long the hog market.  He justified the move by explaining that the packers would be without the necessary hogs because the producers would be unwilling to load and transport them to slaughter.  This would force the packer to bid up the cash in order to meet production needs and to entice the producer to bring them in.  Sounded feasible to me...Wrong!  After a limit-up open the market proceeded to head straight south closing limit-down for three straight days, and leaving me to wonder where it all went wrong.  My friend's philosophy was good in theory, but what I have found more times than not is that the supply chain gets backed up and the hogs get heavier.  Yes supply is kept out of slaughter, but demand also stops.  Just as the producers don't wan't to get out to transport the hog's to slaughter, the mom's don't want to go to the grocery store to buy ham's.  Once the Mom's do get back out, I doubt they will be buying two or three ham's all at once to make up for what they missed out on.  With this said, demand will not grow at all while supplies will build as the hogs sit inside the heated stalls eating more and more feed.  Once the hogs finally make it to slaughter packers will be hit hard and flooded with heavy weight hogs all at once.  The cash bids will weaken and generally leave us working through heavy supplies.  Maybe in the right situation at the right time his plan would have worked, unfortunately for me it did not.  Be careful getting talked into or thinking this will be bullish for hogs, you may see some short-term price spikes, but for the most part it will take the market some time to work through the heavy weights once again.  I am still long-term bullish and I will be looking for a good set-back to build a position for a higher run into the summer months.   
 
 

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