Given the limit moves in Chicago Board of Trade grain and oilseed markets last week — both up and down — the only thing that veteran grain traders are counting on is more volatility for the week starting Jan. 27.

    What’s interesting about last week’s moves is with all the volatility, March corn ended even on the week at 4.98-1/4 a bushel and soybeans dropped $1 a bushel to $12.43 in March soy. CBOT traders expected a downward correction after a run to record highs since the first of the year in nearly all Chicago commodities but the big question is it over?

    “The opinion right now is still mixed as to whether the correction is over or whether it has more to run,” said Mario Balletto, analyst with Citigroup. 

    The exception was the flaming Minneapolis grain market soaring to yet, another all-time high for any U.S. wheat futures contract of $12.67 made in the March. Minneapolis carried CBOT wheat along with it — as the Chicago March contract ended 28 cents higher on the week at $9.33 a bushel.

    This is giving the world grain trade a sneak preview of the main price drama for the first-half of 2008 in the war for acres.

    Export and domestic demand for high-protein wheat, as reflected in the price of Minneapolis hard red spring wheat futures fuels the craziness.

    Friday’s government export report underscored the demand, showing that U.S. hard red spring wheat export shipments reached more than 277 million bushels as of Jan. 17 — surpassing USDA’s spring wheat export forecast of 275 million bushels for the 2007/08 marketing year.

    “It is tight. You’re going to see stocks tighten in Duluth, and when the Lakes open, we’ll lose more,” a Minneapolis trader said late Friday, referring to the grain export terminal on Lake Superior.

    On the domestic side, flour millers began using more high-protein spring wheat in their flour blends starting last fall when MGE wheat futures were trading at a discount to Kansas City wheat. They’ve been reluctant to switch to cheaper varieties ever since, the trader said.

    FOR NEXT WEEK 

    Most likely, macro economics will be the key driver next week — movements in the Dow, crude and gold markets as well as what the Federal Reserve does regarding rates. Any cut in rates only adds weakness to the U.S. dollar and underpins U.S. export demand.

    On the fundamental side, traders remain focused on South American weather, particularly Argentina, the No. 2 corn exporter and third largest soybean producer. It’s been dry there but it benefited from bigger-than-expected rains on Thursday in the western crop areas and the weekend outlook called for more rains. If realized, the rains would weigh on CBOT corn and soy prices on Sunday trade.

    The other factor is export demand, which remains strong despite historically high prices. The drop in ocean freight helped spark big sales this week, especially soybeans to China, the world’s top soy buyer. That’s been reflected in CIF soy values at the U.S. Gulf. Nearby soybeans traded on Thursday at a 46-cent premium to CBOT March vs a 10-cent discount last week, traders said.

    Late Friday the exchange notified traders that it was once again raising margins to hold positions in Chicago Board of Trade corn and soybean, soybean oil contracts. No doubt this could chase a few more market participants out of the market on Monday. Recently it’s been tough for “short” hedgers, i.e. country elevators to meet the escalating margin calls.

Fears of U.S. recession have pushed grain prices and fertilizer stocks off recent peaks. But the chief executive of Potash Corp, the world’s largest fertilizer company, said it’s a short-term stumble. A recession could hurt some industries, but not those based on feeding a hungry and wealthier planet, said Bill Doyle. “Keep in mind we’re not in a luxury business,” he told analysts on Thursday. “Eating is very high on most peoples’ priority lists.” Doyle also said $6/bushel corn is not out of the question, on a day when nearby corn futures closed limit-up at $4.89-1/4.

Here’s part of my interview with Doyle:

Q: Are you concerned about fears of U.S. recession, given the fact that in the past few days, grain futures markets were hit so hard?

A: Everything got hit, and it’s like dropping a bomb: there’s some unintended consequences. We were hit as well. If you think about U.S. recession and its impact on global food demand, I think that there’s very little in common between those two. The reason is that food demand is such a basic item.

You have hundreds of millions of young people moving from a position where they could only eat starch, to where they are now enjoying protein… Once you get used to eating meat and fish, you don’t go back to just eating rice. That switch is so fundamental that it would take a global depression to upset the apple cart. And that’s what a lot of people don’t understand. They think that the U.S. has such a huge impact, and it does in certain industries, but it doesn’t in fundamental industries like our own.

Q: So even though fears have hit grain futures and your stock price, you believe that’s a short term impact, if the economy slid into recession?

A: That’s a very, very short term impact. And the market will see it because for our own company, obviously stock price is related to our earnings, and we’re going to have sensational earnings here in 2008.

Q: You mentioned that you thought you could see corn go to $6 per bushel. Could you elaborate on what sort of parameters you are looking at for that price?

A: An exact date? I’m not sure. I underestimated corn this past year. I’ve been a corn bull for years. When corn was $1.80 (per bushel), I told people, ‘Hey folks, corn is going to easily double and I think we’re going to $5 (per bushel) corn.’ People thought I was drunk, and just didn’t believe it, and all of a sudden we got there pretty quick.

The reason why I say that is the demand for corn is so strong and will continue to be strong. If you think about China alone: meat consumption is growing 20 percent per year, that’s for 1.3 billion people. That is a huge growth in meat. We call it the meat revolution in China. In order to feed those animals, it requires a lot of grain.

China has been traditionally a big corn exporter: China exported about 15 million tonnes into about a 75-million-tonne corn market, and now they’re going to stop exporting altogether (and will become a corn importer).

What I tell you is, with these changing fundamentals around the world, and all these people coming into this point where they have money in their pocket, there’s going to be real competition for that kernel of grain and that food supply for the first time. And that’s a big, big change.

  Volatility is the only sure thing Chicago grain traders can count on for the week starting Jan. 21 (when Chicago Board of Trade screen trading opens on Monday night, not Sunday, due to the Martin Luther King national holiday on Monday). The dismal U.S. economic outlook given the spreading credit crunch and recession fears has sent US stock markets off to the worst start of any year ever, weighing on speculative sentiment. CBOT grains, traders say, also look technically overbought, a factor that weighed in with profit-taking sales in the markets toward the end of the last week.     The exception to this was the wheat market led by Minneapolis — rising to an all-time high of $11.94-3/4 on Friday, up the 30-cent limit - given the scarcity of high-protein wheat and soaring cash markets. 

    The general feeling on Friday among Chicago grain traders was that corn, soybeans and wheat seem to be in a mild correction phase after the run to record highs since the first of the year. But the air of euphoria among grain bulls won’t go away. The US energy bill in December dictated an ever-rising demand for corn acres for ethanol for years to come. Spring wheat’s rally was just another bullish reminder of the war over planted acreage which will be a highlight of US grain markets in 2008. Lastly, with Wall Street stocks in freefall, the flow of hot money into commodities like oil, gold and grains looks set to continue. 

  A sideshow to keep an eye on: the wrenching pain of grain hedgers. Grain buyers are the natural shorts in the market, taking on short futures positions to offset long cash positions. But soaring CBOT futures have caused an unrelenting squeeze as these elevators, merchandisers and processors face skyrocketing margin calls. Many have used exchange for physicals and other cash exchanges to exit their futures hedges, adding stress on their counter parties, usually bigger grain firms. The National Grain Feed Association is up in arms, complaining to the CBOT about inflated prices. Banks are getting skittish about lending money for margin calls on the short hedges they themselves demand of customers. Welcome to the brave new chaotic world of grain risk management.

    Another sideshow: the heightened volatility in CBOT markets has also fed talk that CBOT may expand daily price limits for grains and oilseeds. That is making the 11,000 U.S. country elevators even more nervous with a nightmare vision of margin calls doubling or tripling in the current bullish environment. The CBOT is now surveying elevators, major grain firms like Cargill, ADM and Bunge, and other CBOT customers such as Goldman Sachs on whether grain market price limits should be expanded or even removed. Stay tuned.

    For the coming week, as noted, outside markets like Wall Street and the dollar will continue to affect CBOT grains. On the fundamentals of supply/demand, however, these will be the factors to watch:

South American weather. Argentina, the No. 3 soybean producer and the No. 2 corn exporter, is dry and needs rain to maximize corn and bean yields. They benefited from some showers last week but it needs more. Southern Brazil is also starting to dry.

US winter wheat weather. Since USDA’s crop report on Jan. 11 forecast far lower winter wheat seedings than traders expected, the market has been even more sensitive to harsh weather in the central and southern Plains HRW winter wheat belt.

Export business. Continued strong export demand for US grains despite the historically high prices is keeping traders on their toes. U.S. exporters have already sold 94 percent of the government’s projected wheat sales for the 2007/08 season and there’s still 4-1/2 months left to the marketing year. Then there’s corn. Last week’s corn sales of 2.37 million tonnes were the biggest single week since December, 1994, USDA said.

Does anybody remember when South Korea was complaining about Starlink corn and thumbing its nose at the U.S. in favor of its neighbor China? Last week South Korean buyers booked another 840,500 tonnes of U.S. corn, bringing their 07/08 bookings to 5.8 million tonnes versus 2.3 million at the same time a year ago.

For U.S. drivers, motoring has always been about freedom. Now some folks are saying pumps that offer drivers whatever blend of ethanol they like mixed into motor fuel will increase demand for the biofuel. 

“The future for the entire country is going to be blender pumps. And that will give the consumer the option to put the blend of ethanol they’d like into their car,” Jeff Broin, the CEO of private ethanol company POET said at the Reuters Global Agriculture and Biofuel Summit this week.

Broin, whose company is the top U.S. ethanol producer, said the so-called blender pumps offer drivers the choice of motor fuel mixed with either 10, 20, 30 or 85 percent ethanol. Currently there are a few blender pumps in his home state, South Dakota, as well as Minnesota.

But the great majority of U.S. drivers only have the option of filling up with E10, while some fuel stations, mainly in the Midwest and Texas, offer E85.

Unfortunately for bargain hunters, ethanol’s lower energy content compared to gasoline makes E85 blends more expensive than regular gasoline.  But other drivers may like to pay up because ethanol has higher levels of octane than gasoline.

More choices could boost U.S. demand for ethanol, an industry whose capacity has grown 45 percent this year, amid government mandates and incentives, he said.

Some blends may even be more economical. A study last month said E20 and E30 blends give drivers better fuel economy than either E10 or E85. 

And the pumps have powerful friends.  U.S. Presidential hopeful Democrat Barack Obama and several other Midwest lawmakers last year threw support behind more freedom of ethanol choice.  

While others say regulations would prevent the pumps from spreading nationwide, Broin  holds out hope, in part because the pumps could make him a tidy profit.  “It allows the ethanol plant to haul the ethanol directly to the station… rather than take it to the terminal and pay the extra freight on it… It is a bonus for station owner as well as the producers,” he said.

Of course, to burn anything higher than E10, you need to drive a “flex fuel” car, which auto makers are producing more of these days.

Would you buy more ethanol blended fuel if there were more choices?

$100 a barrel didn’t last long.

After skyrocketing to the all-time peak earlier this month, oil prices have dropped 10 percent to a slightly more managable $90 a barrel — and the world’s energy brainiacs are a bit conflicted over whether this multi-year rally is over.

 Why? To borrow from James Carville, it’s the economy, stupid.

A housing crisis and a credit crunch (not to mention the high price of gasoline at the pump) are showing signs of dragging down U.S. growth. Some economists are predicting a recession. Such a slowdown in the world’s biggest energy consumer has the potential to slow fuel consumption, analysts say – crimping trucking, travel, and manufacturing — and could also threaten the runaway growth in energy demand from developing nations like China. Meanwhile, auto companies are busy designing smaller, more efficient cars in a rush to fuel economy not seen since the 70s.

On the other side of the coin — and there always is one —  OPEC appears to like strong oil prices. The cartel, which shrugged off calls for an output hike in December when oil first flirted with the triple digits, has been equally cool to Bush’s request this week for more supply, signaling a continued tight-fisted policy.  Add to that the weak U.S. dollar and foreign government fuel subsidies that experts say could insulate non-U.S. energy consumption despite a U.S. slowdown, plus instability in big oil producer nations, and you’ve got the ingredients for continued high oil prices. 

Guess we’ll have to wait and see.

A modest proposal from UBS, exquisitely timed for gold’s first foray over $900 an ounce: outlaw gold mining altogether … That was the investment bank’s shrug to a Reuters’ article about a movement to make gold more ethical. One aim is to get gold the Fairtrade Foundation stamp of approval.  This means no exploitation of miners, no more earth rape or toxic chemicals and of course more recycling.  As the satirists at UBS point out, nearly all the gold ever produced is still around somewhere, in vaults,  jewelry boxes, museums and under mattresses.  Fairtrade labelling has been a marketing boon for coffee, cocoa and other goods that have gotten on the green bandwagon. So why not gold? In fact, why stop at Fairtrade?

“Why not go further?” UBS asked “There is plenty of gold in the world as it rarely gets destroyed and can be very efficiently re-cycled. Why not outlaw gold mining as an unnecessary waste of the planet’s resources. Of course this would push the price of gold up, but with 20 years newly mined supply sitting in vaults around the world, there can be no argument for any need to mine gold.”  

Like they say about successful Quaker business owners: “they came to do good and they did very well.” 

After a record-setting 2007, Chicago Board of Trade grain traders had no chance to catch their breath in the first week of 2008. Last week soybeans and soyoil soared to new all-time highs — over $13 a bushel and 52 cents a lb, respectively — while corn jumped to an 11-year high and wheat continued hovering near all-time highs and jumped the 30-cent limit on some days. Veteran CBOT floor traders ask themselves: what next?Traders cited factors affecting the booming grains market: crude oil at $100 a barrel, throwing fuel on the already raging biofuels fire; corn stealing acres from soy, wheat and other crops; the dollar looking even weaker, feeding exports and draining US grain stocks; shaken Wall Street investors flooding into commodities; vague fears of climate shifts feeding crop disasters and magnifying weather scares. What next, you ask? They had one answer: more of the same.

For the upcoming week starting Sunday Jan 6 CBOT grain traders spotlighted factors on their watch list:

Wall Street funds “rebalancing”: 2008 rebalancing of portfolios by commodity index funds, ie. those that take on long positions in basket of commodities and hold the positions for an extended time. CBOT traders late Friday said they were bracing for a bigger chunk of money moving into corn versus wheat and corn versus soybeans as some index funds — the Dow Jones-AIG Commodity Index Fund, for example — were being weighted heavier to corn in 2008 compared to 2007, given the US energy bill’s now-official blessing for the corn-based ethanol boom to continue for years and also on expectations that China, in recent years a corn exporter, will possibly become a net importer in 2008. Index funds hold representative chunks of futures contracts to reflect index computations. However, CBOT traders noted that other commodity indexes are different. The Standard & Poor’s Goldman Sachs Commodity Index is upping its weightings in all three CBOT grains, for example.

Standard and Poor’s also announced back in November that its investment in all commodity indexes this coming year will be increased to $150 billion from $100 billion, effective January 2008. So hold onto your hats as these adjustments add to volatility but also generally bullish sentiment toward of commodities as Wall Street money moves into commodities during 2008 as a hedge against inflation and financial uncertainty.

Southern hemisphere weather: the weather in Argentina — the world’s No. 2 corn exporter, No. 3 soybean producer and No. 1 soymeal and soyoil exporter — is being watched by CBOT traders throughout each session. It’s been dry there and on Friday forecasters were pushing the expected rains back until later this coming week, feeding bullishness. Dryness raises worries about maximizing corn and soy yields. The corn crop is also just starting to pollinate in Argentina, the key growth period for yields. Corn likes hot days and cool nights. But rains this month will be critical for corn yields. The critical month for soybeans is February. 

USDA data tsunami: The coming week will be capped off on Friday Jan 11 (at 7:30 CST/1330 GMT) when the U.S. Agriculture Department issues its largest one-day flood of data for the entire year. USDA will release its final 2007 U.S. corn and soybean production numbers; report the amount of wheat, corn and soybean stocks on hand as of Dec. 1; forecast U.S. winter wheat planted acreage; and update its world and U.S. 2007/08 estimates for season-ending stocks, always the “bottom line” numbers for the CBOT traders in terms of future supply-demand.

Early rumblings among CBOT traders and analysts on Friday held that USDA will cut its estimates of last fall’s U.S. 2006/07 corn and soybean harvest and forecast 2007/08 U.S. winter wheat plantings up considerably given record high prices for autumn planting. Reuters reporters will issue average analysts estimates and comments early in the coming week, setting the stage for “fundamental” expectations. 

But for daily trading, “fundamentals” of supply and demand remain only one part of the “reality check” powering the brave new world of CBOT grain markets in 2008. The other two are both wild cards, one old and one new: Weather and Wall Street fund investors, with the latter especially adding a lot more leverage in grain markets from non-grain factors (ie. the dollar, the credit crunch, interest rates) than in the simple, bygone days of, say, 2005.  

The year just past was the perhaps the biggest for commodity investors in decades. Indexes comprising energy, metals and agricultural commodities ended the year up almost 30 percent on average, an embarassment of riches compared to the paltry rewards in the global stock and bond markets.

Will the commodities craze continue in 2008? Gold, silver, crude, heating oil, copper, wheat, soybeans, orange juice and cocoa prices are soaring on the first trading day of the year, so the signs are auspicious.

Commodity indexes 2007
S&P GSCI +32.6%
DJAIG +16.1%
RJ-CRB +22.8%
RICI  +31.0%
DBLCITR  +41.1%
Average: +28.72%

Other indexes
S&P 500 Index + 4.24%
Lehman Aggregate US bond index + 6.63%