Grain Prices Head Higher, But for How Long?

Published on: 15:13PM Sep 26, 2011


Even with today showing signs of strength, I wouldn't take your seatbelt off just yet; I have to believe this wild ride is still far from over. Soybeans have now broke more than $2.00 from their August highs. Just in the past week, the funds have liquidated close to 50,000 corn contracts and over 60,000 soybean contracts, and they now sit massively short CBOT wheat (largest short position since the early summer of 2010). Rest assured, there is certainly blood in the water and the sharks are still swarming. Do you realize that traders holding just 10 long silver contracts in the past five trading sessions have lost a half million U.S. dollars? Just think for a minute about what has happened to the large diversified funds that are holding long positions in silver, gold, copper, crude oil, corn, soybeans, coffee, sugar, etc. To say the least, they have gotten their bell rung. They were already on the ropes; now a flurry of blows leaves many in the trade asking if they will be able to make the "standing 8 count." 

Soybeans have definitely taken it on the chin as of late, and I am extremely happy that we exited our long soy short corn trades with profits when we had the opportunity a couple of weeks back. There has been a strong seasonal play the past few years to be short November beans from late September into early October, and we are certainly seeing the trend continue. The key moving forward will be just how many cargoes of soy end up being sourced from the U.S. versus South America. The next six months will certainly tell the tale. If you look at last year's numbers, you can see that of the 21 million tons of soybeans China imported during the fall and winter months, only about 2 million tons came from Brazil. I am hoping that trend continues, but I assume a lot will depend on "quality" and "currency." Speaking of quality, soybean oil was under extreme pressure last week, and this may be a market that we need to start keeping an eye on. If the talk about more "green" beans and potential frost damage up north plays itself out, we may see less available bean oil later on down the road -- just an FYI. 

As for corn, the "tech" traders seem to have their eye set on the $6.15 to $6.20 area, and I am afraid they may find the momentum this week to make it happen. For this reason, I continue to remain on the sidelines. The risk of a "domino type" effect taking place if Greece were to default has simply become too much for most to handle. In my opinion, some type of resolution or longer-term game plan has to be proposed and accepted before the funds start adding more risk. 

The next biggest catalyst for the eurozone will likely be tomorrow when the Greek Parliament votes on a property tax measure that needs to be passed in order for the country to qualify for the next round of bailout funding. I am afraid, though, that it will only be a matter to time before the trade starts to focus on China, which overnight saw the Hang Seng Index fall 1.7% to its lowest in more than two years, China's Shanghai Composite down 1.6% and the Nikkei Stock Average lose 2.2%. All I can say is that you need to be extremely cautious, as there have still been zero workable solutions proposed for the European debt situation, the slowdown in China and U.S. unemployment. Gold has rallied back over $100 from the overnight lows, silver has rallied back big as well, soybeans are some 30 cents off of their lows and wheat has made a 20 cent recovery. The Greek vote tomorrow is still looming; the German vote later this week will be another hurdle. I personally doubt we have seen the low of the move and will continue to sit on the sidelines looking for more bargains.  

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