VOLATILITY DUE IN GRAINS — CHOPPY BUT HIGHER?

January 21, 2008

  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.

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