Subprime margin calls chip away at grains; USDA, dollar still point to bullish fundamentals

March 9, 2008

As one Chicago grain analyst Roy Huckabay said last week: “Big prices have big corrections.”
That pretty much summed up last week’s price moves in Chicago Board of Trade soybean markets. To some extent, easing Chinese vegoil cash prices spurred the CBOT sell-off, with soybeans and soyoil hit the hardest — falling 8 percent on the week. A large part of the CBOT soy rally since Jan. 1 was linked to strong Asian demand for soybeans and vegoils.
But most veteran traders said a bigger culprit behind the market dive was a fallout from the subprime debacle. Hedge funds were forced to liquidate positions in different financial arenas late last week to meet margin calls. That spilled over to the CBOT markets, traders said.
Chicago corn closed down the 20-cent limit in all the contracts from May 2008 through July 2009 on Friday, but was off only 1.6 percent on the week. (There are no limits in the March contract as its in delivery.) CBOT wheat also sank on Friday with the May contract sliding 20 cents. But wheat ended higher week-to-week after tanking the week of Feb. 25. The soft dollar, shrinking global grain inventories, and concerns about weather and climate changes impacting crop yields remain supportive factors.
Will we see more selling this coming week? Or does the 8 percent drop in CBOT soybeans and soybean oil spur fresh buying?
Sunday electronic trade should be interesting.

Market factors to watch the coming week:
Global market action. Tight money markets and tumbling stocks and the dollar were expected to heighten worries for investors.
Mounting evidence the economy has entered a recession. Will that lead to investors to fresh buying of CBOT grains as a hedge against inflation or will investors step back from all markets? The government will release the Consumer Price Index, an inflation gauge, on Friday.
USDA to release updated supply-and-demand figures on Tuesday. Analysts expect the government to shave several million bushels off their 2007/08 ending stocks estimates for corn, wheat and soybeans due to strong global demand for U.S. commodities amid a record low dollar and shrinking world grain inventories. A bigger impact on prices will be the March 31 planting intentions report that will give the base estimates for U.S. corn, soybean and spring wheat seedings.
South American harvest progress, especially soybeans. As more Brazilian and Argentine soybeans move into marketing channels, demand for U.S. soybeans should wane. CIF values at the U.S. Gulf were plummeting this past week as export demand eased with the world soy buyers turning to South America for fresh supplies.
National Oilseed Processors Association crush report on Friday. The data will give analysts and traders the first look at the U.S. crushing pace for soybeans during February.

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