President George W. Bush will sign into law an energy bill this week that will boost fuel efficiency of U.S. cars and trucks for the first time since 1975, and require a huge increase in the use of biofuels like ethanol.

The move comes in a year oil prices struck an all-time high near $100 a barrel amid concern that demand is rising more quickly than supply.

It truly appears that there’s not a bear anywhere to be found in the Chicago Board of Trade commodity markets. As soon as the USDA on Tuesday cut its estimates of how much corn, soybeans and wheat will be left at the end of the marketing year, Goldman Sachs turned around and raised its 2008 price forecasts for soybeans to $14.50 a bushel, corn to $5.30 and wheat to $7.50. Then the Senate approved on Thursday the energy bill that would require the production of 36 billion gallons of biofuels by 2022 — five times more than this year’s output.

    By Friday, Chicago Board of Trade wheat futures hit an all-time high of $9.81-3/4, soybeans rose to a 34-year top of over $11.60 and corn continues to trade over $4, far above its decade-long average of $2.40.

    As CBOT traders like to say: “No one wants to get in front of this freight train.”

    Traditionally, the week before the holidays is pretty slow in Chicago. Every pit has a party, typically on the trading floor followed by refreshments at their favorite bar after the markets close. But as said before — there’s nothing traditional, typical, historical about today’s markets.

    Next week traders will be watching:

    Open interest. After Friday’s rally, traders will be checking open interest in corn, wheat, soybeans and soymeal to see if it jumped — meaning new longs entered the market — or it fell — a sign of short covering. Given the anonymity of screen-trading, it’s impossible to know who’s moving the markets day to day.

    Trade data from the Commodity Futures Trading Commission. CFTC trade data issued Friday showed that managed funds and other large speculators expanded their net long positions in corn to 122,000 contracts and in soybeans to 138,000 in the week ended Dec. 11. (On the side, the building of huge long positions by specs, an inflationary factor, is increasingly getting on the nerves of grain merchants as they question the hedging viability of CBOT contracts.) But funds were still short CBOT wheat by some 23,000 lots which could explain part of wheat’s strength last week in addition to USDA cutting its U.S. wheat end stocks estimate to the lowest in 60 years this week.

    South American weather. It’s crucial that South American weather poses no threat to corn and soybean yields this year. This is especially true for soybeans as the world, hungry for food and fuel, is counting on Argentina and Brazil to pick up the slack from the U.S., the No. 1 soy producer, after American farmers planted a smaller crop in 2007. Already, South American weather is playing into prices even though the critical yield determining period is January for corn and February for soybeans. The strongest La Nina in 20 years is raising concerns that Argentina and southern Brazil could see a dry growing season because of it. Right now, traders are focused on Argentina, which has been dry up until this week when it saw surprise rains on Thursday.

    Export business. The value of the dollar, rumors of fresh business will stir prices.

    Energy markets. Over the last few weeks there’s been less correlation between corn and soybean prices in relation to the New York crude oil. But soybean oil, a major ingredient to produce biodiesel, continues to track crude oil pretty closely.

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Wheat futures are making new ground above $9 a bushel in Chicago - track the rise in red in the chart above with the broader CRB commodities index in black. The rise in basic food ingredients like wheat isn’t making things any easier for central bankers trying to keep the credit markets from freezing up. Wheat prices are the stand-out example of “agflation”, Veronica Brown and Nigel Hunt reported here. Prices have more than doubled to record highs this year in the U.S. and Europe. Crop pressures, red-hot emerging market demand and the biofuels revolution are the drivers.

Gertrude Stein said “A rose is a rose is a rose,” … and in Washington, a $286 billion farm bill is a $6 billion farm bill . They’re all the same thing, just like Stein’s roses. It’s a matter of bookkeeping and some pique.

Until this decade, farm bills were described by the amount of new spending they authorized, the yardstick used on most bills in Congress. The 2002 U.S. farm law was the first where the underlying spending — programs that are continued as part of the legislation — was lumped into the estimate.  It made the farm bill sound a lot bigger, somewhere around $200 billion instead of $51.7 billion in new spending.

With that precedent, the farm bills pending in Congress are described as $286 billion bills, a very large amount of money. Some congressional staff workers grumble at the tag “$286 billion farm bill,” because it sounds as if the money will be paid in a lump sum and it goes in total to farm subsidies.

Neither of those things will happen. It’s a five-year bill and public nutrition programs such as food stamps and school lunch get nearly two-thirds of the money. The Congressional Research Service has a chart that illustrates the breakdown. The chart also helps explain how $286 billion is the same as $6 billion.

When only new spending is counted, the new farm bills are $6 billion bills. When all of the continuing programs are counted, the farm bills would cost $286 billion over five years. The figures are estimates, of course.

Early on, lawmakers faced the challenge of writing a farm bill that spent no more than the $280 billion available in the “budget baseline,” the amount that existing programs would cost if extended into the future. With the offsets, the farm bill equals the baseline, too.

Picture: File photo of man at Republican Party congressional election rally in Grand Island, Nebraska, November 5, 2006.

– Chuck Abbott, Washington

Oil prices have slumped more than 10 percent in less than two weeks as traders focus on signs a slowing U.S. economy could cut into world energy demand growth. After climbing to a record over $99 a barrel Nov. 19, the price of crude has dropped to below $88.

The decline in crude prices may eventually filter down to consumers in the form of cheaper gasoline and heating oil. But it could also lead oil cartel OPEC to decide against a widely-requested increase to crude output when it meets in Abu Dhabi on Dec. 5. 

Now that November is in the books, some CBOT grain traders said commodity index funds will also begin to close their books for the 2007 year, cementing robust gains. For the first 11 months of 2007, wheat posted the biggest jump — up 73 percent — followed by soybeans, up 58 percent. 

    USDA skips December for U.S. crop production reports, with final harvest ideas pretty well set and next year’s planting ideas too vague to feed trading as yet. South American weather is a volatile factor after the first of the year. The year-end holidays also drain the markets of liquidity as traders take time off.

    So with less of a heavy hand from big speculators, grain traders were expecting a little more range-bound trade based on fundamentals in Chicago Board of Trade grain and soy markets in the coming month.

    That would follow one of the most volatile harvest seasons in memory — wheat regularly jumping and falling the 30-cent daily trading limits, soybeans notching 34-year highs and corn for next year’s harvest already priced at $4.30 a bushel, more than double the decades-long mind-set of $2 corn. Whoa.

    In December, one thing won’t change: Chicago grain traders will continue watching outside markets for direction — crude oil, the value of the dollar, and prospects for yet another interest rate by the Fed Reserve when it meets on Dec. 11.

    On the fundamental side, South American weather will be a daily key. Traders are most focused on Argentina, the world’s No. 3 soy producer. Fields there have been hot and dry this week, depleting soil moisture as the newly seeded soybean crop tries to emerge.

    Argentina is expected to see showers by Tuesday, which will help alleviate stress to the young plants. But any change in the forecast, either less or more, will feed into the daily calls for CBOT soybeans, meal and oil.

    Fresh export sales, possible cancellations and actual shipments reported by USDA will also be market-leading news.

    Wheat traders will be zeroed in on fields closer to home. Worries continue about the dryness in the western Plains hard red winter wheat belt. That crop accounts for about half of U.S. wheat and most of U.S. bread flour. But the crop is rated in the worse shape in six years due to an exceptionally dry fall. It will go dormant with cold weather but lack of snow cover can also expose the seedlings to wind damage.

    The current La Nina — a global weather anomaly based on cooling sea surface temperatures in the Pacific Ocean — is rated as the strongest in 20 years. That is being blamed for the persistent dryness in the western Plains wheat belt.

    The strengthening La Nina could also cause some abnormal dryness in southern Brazil and Argentina as the crop season progresses — a development that would feed speculative buying in very edgy global grain markets already spooked by fears of global warming, China’s limitless appetite and the wild card of biofuels demand that has been eating into the world food system’s grain supplies.

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