The buzz among traders on the floor of Chicago Board of Trade this week was the pending battle for U.S. acres — poised to be one of the messiest in history. It will be a price fight as global demand targets the country’s three top crops — corn, soybeans, wheat.

    One flash point was USDA’s preliminary U.S. acreage estimates released during its annual outlook conference held this week, Feb 21-22, in Washington, DC. The other is the start of the planting season which is just six weeks away in the heart of the Corn Belt.

    One prominent Midwest agronomist at Iowa State University, Palle Pedersen, said this week “it’s going to be an interesting spring.” Pedersen, who works with farmers from the top crop state of Iowa, said they are in quandary on how many corn and bean acres to plant. Lately, he’s been getting a sense that Iowans are looking more seriously at soybeans — as the price for new-crop CBOT November soybeans has rallied more than 20 percent since Jan. 1, hovering near $14 a bushel, and input costs to plant corn, like anhydrous ammonia, are skyrocketing.

    This week USDA guesstimated that U.S. farmers will plant roughly 6.8 million more crop acres this year compared to 2007. Corn seedings could be the second largest in history since 1944 at 90 million acres vs. the 93.6 million planted in 2007. Soybean acres were forecast to jump to 71 million from 63.6 million last spring and all-wheat seedings were seen at 64 million, up from 60.4 million.

    The big question is where are all the extra acres coming from? Many veteran traders are asking: “What is the government ’smoking?’”

    Sure, the USDA is saying some 2 million acres could come out of the Conservation Reserve Program. There will be fewer rice and cotton seedings and a big soft red winter wheat crop that will result in more double-crop soybeans (planted after the SRW harvest) in the southern Midwest. But analysts are still saying that’s not enough.

    Whether the numbers are right has yet to be seen. But surely all three markets are positioning themselves to keep pace with one another in the volley for acreage this spring.

    The first set of serious government numbers will come on March 31 when USDA releases its planting intentions report, based on actual farmer and industry surveys. Traders are saying to hold on to your hat until then.

    Economist Bill Lapp, president of Advanced Economic Solutions, said it perfect last fall at an industry conference in Chicago: “The acreage battle in 2008 is going to make the acreage battle in 2007 seem like a child’s game.”

    Relations between the U.S. Agriculture Department and the Humane Society of the United States are a little strained right now.
    In January, the Humane Society released the shocking videos of workers at a California meat plant workers using all manner of abusive tactics to get unfit cattle into the slaughterhouse.
    This week at the USDA’s annual outlook conference, Agriculture Secretary Ed Schafer complained that that the animal rights group held on to the video for four months before making it public.  Could this be sour grapes that the USDA itself did not expose the grusome conditions at the plant?
    “They had a big, huge impact on this issue because they were not forthcoming with the information,” said Schafer, who was concerned about the department’s relationship with the animal-rights group.
    “I’m looking forward to visiting with them because we should be partners in our common mission of the humane treatment of animals.”
    Schafer said that by holding on to the video, the Humane Society of the United States failed to prevent four months of meat production from entering the marketplace that was later recalled. It’s failure to release the video also was surprising for a body that claims to promote the safe treatment of animals, he said.
    Humane Society President Wayne Pacelle fired back that it took time to conduct the investigation, analyze the information, check laws and work with authorities conducting a criminal investigation.
   “They are attempting to divert attention from their own shortcomings,” said Pacelle. “He keeps misrepresenting the timeline on this.”
    The shocking undercover video (beware!)  showed Hallmark/Westland Meat Packing Co workers using a variety of abusive techniques to force sick and injured cattle into the slaughterhouse so they could be processed into food for human consumption. 
   This week, Hallmark/Westland announced it was recalling 143 million lbs of meat, mostly beef, from the plant where the abuse occurred.  It was by far the largest meat recall ever and some of the meat  from the plant ended up in school lunch programs, which the USDA oversees. 

 – Christopher Doering, Washington  

The world’s biggest oil company and the world’s No. 7 crude exporter are trading blows in a dispute that is further eroding the U.S.-Venezuelan relationship and putting energy supply on the line.

Exxon, which was pushed out of a huge Venezuelan heavy oil project last year as part of a nationalization drive, has taken the country to court in an effort to secure compensation, winning orders freezing $12 billion in Venezuela’s assets around the world. 

In response, Venezuela has railed against Exxon’s legal “terrorism” and has stopped oil sales to the company. Venezuelan President Hugo Chavez, who has accused the Bush administration of backing a failed coup to overthrow him, has also said Exxon’s courtroom assault is part of a plan orchestrated by the Bush administration to oust him.

Big scary moves that could further cool the already frigid relationship between Washington and Caracas, which have steadily declined since Chavez first won office in 1998 despite the two nations’ close economic ties.

But for the moment, there doesn’t seem to be much real impact on the availability of oil to the market. While oil prices have rallied on the rising tensions, analysts say the effect of the fight on U.S. oil supplies and on the operations of Exxon Mobil or Venezuela’s state energy company appear almost nil.

“Venezuela doesn’t want to halt sales because Chavez needs the revenue,” said Eric Wittenauer, analyst at AG Edwards.

“It looks like Exxon Mobil can pretty much buy from others the same oil Venezuela is denying it,” said Mark Waggoner, president of Excel Futures.

       There’s only one thing Chicago Board of Trade traders will be watching when the U.S. grain markets open on Sunday night for Asian trade — wheat prices, in particular Minneapolis spring wheat. All three U.S. wheat exchanges in an emergency action late Friday decided to raise daily trading limits to 60 cents per bushel from 30 cents trying to break a deadlock in the runaway wheat markets. 
    For five consecutive days last week U.S. wheat futures markets rose the allowable 30-cent limit, with buyers overwhelming sellers and freezing trade until the following business day. CBOT traders said on Friday at one point there were 100,000 unfilled buy orders waiting to get into CBOT wheat, the busiest futures market of the three.
    Once the wheat market hits the limit, exchange rules prohibit trading until the next day. The only way traders have been able to trade these locked-up markets is through options. And options trade late Friday indicated that MGE March wheat was being valued at $20 to $21 a bushel versus its Friday close at $15.53  — a record high and three times the price of a year ago.  Options traders using these “synthetic” values also valued CBOT March wheat at 72 cents higher than Friday’s close and KCBT March wheat about $1.20 higher.
    So the stage seems set to have the buyers continue to overwhelm sellers on Sunday night. But one wild card will be the sharp increases in margins all exchanges have made. At Monday’s close, initial spec margins on each CBOT wheat contract will rise to $4,050 — up 100 percent from Friday — and KCBT wheat margins will also rise to $4,050 –  up 116 percent. MGE on Thursday already raised its wheat spec margin 54 percent to $3,510 per contract. More to come?
    How many players will be forced out of this poker game because they can’t ante up?
    In any case, for prices all eyes will remain on Minneapolis. The cash market is red-hot as exporters and millers scramble to find high-protein wheat. Grain firms holding short positions to hedge their cash positions are getting hammered by escalating margin calls. 
    As the week progresses the exchanges will systematically expand the trading limits by 50 percent, to 90 cents, on the next business day and another 50 percent on each subsequent day when two or more contracts in the same crop year close limit-up. 
    Chicago traders late Friday were most concerned what was going to happen to the futures spreads come Sunday night and Monday morning as the locked limit-up move was making it impossible for index funds to roll their long futures position. Funds like Goldman Sachs begin rolling their long position on the fifth business day of the month, which would have been Thursday, Feb. 7. 
    Some 60,000 CBOT wheat spreads, or 120,000 contracts need to be traded in Chicago by index funds, Chicago veteran traders estimated Friday afternoon. 
    “We already lost two days of the Goldman roll … we won’t be able to get it all done on Monday,” one Chicago wheat trader said. 
    Trade data released late Friday by the Commodity Futures Trading Commission showed that index funds were net long roughly 190,000 CBOT wheat (combined futures/options) positions and 29,000 KCBT wheat as of Feb. 5. The CFTC does not break out index positions for MGE wheat due to its smaller open interest and trading volume; but commercials held nearly 69 percent of the shorts in MGE wheat futures. The squeeze on all commercial hedgers in wheat has been unrelenting and looks to get worse in the coming week as the market tries to find adequate sellers in the runaway rally.

World wheat prices are soaring to record heights, but the rally has been particularly sharp for high-protein spring wheat, used to make bread. Minneapolis March spring wheat futures have jumped more than 85 percent since farmers in Canada and the U.S. northern plains finished harvesting a small crop that was quickly swamped by demand by panicked buyers. Winter wheat varieties traded in Chicago and Kansas City have lagged behind.

But since Jan. 9, the contract has been on a steep upward climb that has traders talking about shorts getting squeezed… especially the Canadian Wheat Board, which has a monopoly on sales of spring wheat from the Prairies to millers and export markets. I talked to Curt Denisuik, the CWB’s director of commodity risk management, about the rumors on Feb. 6. He declined to comment on commercially sensitive details about the CWB’s position. But he said the main reason for the climb was the shortage of wheat:

“I know there’s lot of people who are speculating that the Canadians are the reason that the market is going higher. But really, you need to look at the supply and demand for wheat. What the numbers kind of tell you when you look at that supply and demand analysis, is they (U.S. exporters) have been selling more on a per-week basis than they need to to meet those export numbers. The market is trying to attract … every last bushel in the bin. If these prices can’t do it, then the market will go higher, or someone will have to cancel a sale, and take a different alternative.”

“The other comment that I want to make about our position is that you need to understand with U.S. futures, the delivery process is such that the taker of delivery … has the right to request certificate of U.S. origin for any grain it receives. Of course, as the supplier of Canadian grain, we can’t supply that, and we never put ourselves in a position of either making or taking delivery. We don’t participate in the delivery process in the U.S. futures. We are very confident that we will not be participating in the delivery process for the March futures in Minneapolis.”

Q. As you mentioned, there’s a lot of speculation that the board has been caught short or is getting squeezed. Can you speak to that?

A. “There are a number of participants in the market. We’re comfortable with our share of the open interest. The market is trying to set the price for the grain it requires in March delivery position. It’s influenced by a lot of things and I can’t see that our position is a driving factor behind that. That’s not to say that others might view it differently.”

Q. Obviously there’s scare supplies, but for Minneapolis futures, does the story go beyond supply and demand, seeing it locked limit up each day?

A. “There’s some discussion about the appropriateness of 30-cent limits… As a seller, we’d prefer obviously for the market to get to its trading level faster. But the reason that 30 cents (per bushel) isn’t appropriate any longer is because we’ve had this dramatic move up in price levels. What was appropriate when prices were at $5 (per bushel) clearly isn’t appropriate when prices are at $10 or at $15 or above. You should probably have 60 or 70 or 80 cents, and that’s probably more than the market wants to handle. They want to be able to make sure that they can adjust margins and all the aspects that make a marketplace work have to be taken care of.”

By the looks of the $3-a-gallon prices at the U.S. pumps, you’d think gasoline supplies were running out. Oddly enough, they’re brimming. The latest data from the Energy Information Administration shows inventories have grown to their highest level since 1994, when a gallon of the fuel went for a buck.

Before you become outraged…

The increase in inventories IS expected to push prices lower over the winter, possibly by as much as 50 cents, experts said on Wednesday. The main reason prices are pointing lower and supplies are pointing higher is that Americans — pressured by recent high energy costs and an uncertain economy — appear to be reducing their consumption.  

There’s talk of a recession and foreclosure rates are still through the roof.

But pricey gasoline still tops the American consumer’s list of worries, according to the National Association of Convenience Stores (NACS), which released its second annual consumer survey on Monday.

About half of U.S. consumers (45%) say they’re more likely to change their spending habits due to high gasoline prices than they would for rising home energy costs (26%), rising food costs (24%), a slowdown in the economy (22%) or the mortgage and lending crisis (13%).

Most American drivers haven’t cut back on their driving yet though. Thirteen percent said they’ve already cut back, and another 50% said they’ll hit the brakes at $3.25 (a penny higher than the current record of $3.24 in May 2007)

During the last year, soaring gasoline prompted 19 percent to switch away from gas guzzler; another 19 percent said they just thought about it.

Higher gasoline prices have consumers literally pinching pennies, the survey said, with 38% willing to drive 5 minutes or more out of their way just to save 1 cent.

Will going out of the way pay off for thrify consumers? Most likely, they’ll be driving themselves into the red, losing about $1.40, says NACS.

    What a difference a year makes. Last year, Chicago traders were focused on watching their home-town favorite play in the Super Bowl. This year it’s runaway U.S. grain markets.

    For starters, all eyes are on the soaring Minneapolis wheat market — surging to an all-time top of over $14 a bushel on Friday, Feb. 1. The Minneapolis wheat market will continue to monopolize price direction for all food commodities given the huge demand for high-protein wheat — both from exporters and domestic flour millers, they said.

    U.S. export sales of hard red spring wheat, the variety traded on the Minneapolis Grain Exchange, have exceeded USDA’s forecast of 275 million bushels. Traders are waiting to see if the government makes any upward adjustment to its U.S. wheat export forecast to reflect the big demand when it issues its monthly supply-and-demand report on Friday, Feb. 8.

    Demand for U.S. corn and soybeans also have been strong and “is still an underlying supportive feature,” one CBOT trader said. “We’re in a demand period so we are going to have to watch it and see if that continues to drive the market.”

    The weakness in the dollar, largely tied to the Fed’s move to lower interest rates has been a big input in stirring export demand this season, traders said.

    The other key fundamental factor that CBOT traders will be watching is how much more rain Brazil’s No.1 soy state of Mato Grosso gets. The heavy rains were seen delaying harvest and increasing the chances of an outbreak of the yield-cutting soy rust disease.

    More talk will begin circulating among the Chicago grain crowd as to how many acres of corn, soybeans and spring wheat U.S. farmers will plant this spring. The general ideas are that corn acres should be down from 2007 while soy and spring wheat will be up. But nothing is written in stone as the battle for acres is real — giving CBOT traders lots of uncertainty to trade. USDA’s first planting intentions report will be issued at the end of March.

    That’s it for the fundamental inputs.

    Macro economics will also drive prices. Everyone keeps asking whether CBOT grains and oilseed markets will be insulated from a possible recession. Some say that people have to eat so regardless of what happens to the Dow, demand for commodities will stay hot. Others disagree citing financial market worries could easily spill over to commodities, triggering speculators to pull money out of Chicago grains and oilseeds as well.

Beans in the teens, wheat in the teens, corn in the … well, above $5 a bushel. Do we have a bubble here? On Thursday, a Wall Street Journal story said farmers were wondering if grain prices would go the way of dot-coms or, more recently, housing. Wonder they should. (A Sept 28 Reuters story “U.S. ‘grain bubble’ in the making,” now looks a little premature.)

U.S. wheat prices are up 6 percent so far this year, topping $14 a bushel for the first time ever, at least on the Minneapolis Grain Exchange. That followed a 77 percent gain last year. Corn in 2008 is up 10 percent at 11-year highs, following last year’s 14 percent rally. Soybeans are toying with $13 for the first time, having gained 76 percent last year.

Some argue that agricultural commodities are less susceptible to a U.S. economic downturn. People still must eat. The Chinese are able to improve their diet as they get richer, for one. The biofuel crop craze has diverted food from people and livestock. Strange weather around the world has also wrought havoc on supply. Yet, over the last three decades, it looks like downturns in economic growth have preceeded declines in agriculture prices. (In the chart above, recessions are the shaded gray columns.)

And what are some of the most dangerous words in the market… “This time it’s different.” But what do you think? Are grains overbought?