CBOT grains wait on sidelines for bailout fallout on markets, dollar

September 28, 2008

The volatile and worsening U.S. financial crisis and the on-again, off-again plans for a $700 billion U.S. government rescue plan to free up credit from Wall Street to Main Street made Chicago grain markets a sideshow in the past week — but promised to continue to keep grain traders on tenterhooks Sunday night until a resolution is found.
     CBOT electronic markets on Sunday night were like Asian markets and OTC markets around the world — waiting.
     Lack of a credible agreement — and “credible” might remain a key debating point even after a deal was agreed — was sure to continue the black mood of all market speculators, worldwide, amid bank failures, frozen credit and a political witches’ cauldron a month ahead of a U.S. presidential election. On the other hand, agreement by the main opponents of the compromise — conservative Republican and Democrats facing the voters in a month — to bite the bullet and back a deal would likely boost a relief rally in equity and bond markets, as well as the dollar.
     Scenarios abound about the bailout drama. If credit tightens with no bailout, trade finance would tighten too and the dollar fall. Would that be bullish grains as importers rush to book shipments? Or would spec money in all markets flee to safe harbors like T-bills and gold, weighing on  grains and even oil.

       Last week, the Chicago Board of Trade corn, soybean and wheat markets saw their share of volatility as investors and grain firms sat waiting for word from Washington. It was a low volume trading week as traders kept to the sidelines — too risky for most — with grain prices and open interest close to unchanged on the week.
     “The uncertainty is creating big problems for everything,” Roy Huckabay, analyst with The Linn Group in Chicago, said on Friday.
     “If they come up with a bailout package I don’t necessarily think it’s bullish commodities — it’s a matter whether it will calm people’s fears a little,” one CBOT trader said.
     There’s also a lot of talk within the halls of Chicago trading firms and on the CBOT trading floor about the likelihood of month-end, quarter-end liquidation of portfolios that could occur on Monday and Tuesday, the trader added. “We will have to keep our eye on that.”
     Then, after the month-end book adjustments, it’s the start of harvest across the Corn Belt, seasonally a bearish period for grain prices.
     However — not unexpected in a season when traders have learned to expect the unexpected — speculators may come back in buying on weather fears: the upper Midwest could see its first killing frost of the season by Wednesday or Thursday morning, something that with this year’s lagging growth of the crops could spur spec demand.
     But some Chicago traders also brushed off the threat, saying last week’s warm, dry weather was ideal for helping the delayed maturity of late-planted or flood-sogged corn and beans, helping crops to catch up and ripen and this reduce the potential of freeze damage. Weekly crop progress updates will be issued by USDA late on Monday afternoon, after markets close.
     Another piece of information that traders will scrutinize comes on Tuesday, when USDA will report the amount of corn, soybeans and wheat held by farmers and commercial grain firms on Sept. 1. The numbers are key to grain traders and analysts after two years of huge drawdowns in grains due to global droughts, rising Asian demand and burgeoning biofuels use.


In my opinion, fundamentals are not at play anymore in the grain markets. Tangible commodities like wheat and associated grains will soon be the new frontier as they were in ancient times. The finance wizards who just got their hats handed to them, have quietly been been looking for a new place to play, and the wheat fields are so beautiful. Despite the current look of the charts, I believe these guys are fixing to raise the price of my daily panini sandwich.

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