US dollar, oil join Mother Nature as powerful forces at work in CBOT grains

September 7, 2008

Chicago Board of Trade grain markets deflated last week as the dollar soared to an 11-month peak. It’s a pattern that began last month and will continue as long as the dollar rises and makes US grains more expensive to overseas buyers. 
    A big part of the record rallies in commodities over the past 18 months or so was tied to the weakness in the dollar. As the greenback hit new lows, grains soared to record highs. Now that the dollar is up as inflation fears underpin ideas of firm U.S. interest rates, commodity funds have lightened their long positions in CBOT markets –  clearly marked by the big drop in open interest over the past month. 
    In the most active CBOT grain contract, corn, open interest fell 3 percent in the past week — down 32,000 contracts to 1,050,883 contracts by Friday’s open. Since August 1, corn open interest has dropped 14 percent. 
    Commodity funds have been hit hard as they’ve seen portfolio values slide.
    The latest fund to close was the Ospraie Management LLC flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resource equity holdings. It was one of the biggest closures ever of a commodities-focused hedge fund. 
    Besides the firming dollar, Chicago grain traders will be keeping an eye on crude oil as a sign for market direction. Hurricane Ike, the second storm to hit or threaten the Gulf Coast in less than a month, could spark a rally in crude oil if it appears to threaten coastal refining operations. If that happens, grains will likely follow higher, traders said. 
     By midday on Sunday Hurricane Ike was bearing down on Cuba and forecast to swirl into the Gulf of Mexico by Tuesday. Its path is uncertain but the U.S. Gulf Coast from Texas to Florida look to be at risk.
    Any hit to that area also threatens U.S. grain exports. Grain elevators in the New Orleans area as of Friday were still trying to reopen from Hurricane Gustav’s hit last week. 
    Last but not least, traders are waiting for USDA to issue its next U.S. corn and soybean production forecasts on Sept. 12. Floor traders have been arguing about the size of the U.S. corn and soybean crop since USDA’s surprisingly big yield forecasts last month. USDA pegged the second largest corn crop in history at 12.3 billion bushels and the fourth biggest soybean output at 2.97 billion — despite the shaky start to the growing season and after one of the worst floods on record to hit the heart of the Midwest Corn Belt in June.  
     But it remains a mixed bag among grain traders and analysts whether the government will raise or cut its production outlooks. Bottom line: the September report should give traders a clearer picture of production as both corn and soybeans were still far from maturity last month when the first USDA field surveys of the season were conducted for the August report.

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