Fasten Your Seat Belts as Roller Coaster Ride Continues

October 26, 2008

    It sounds like a broken record but Chicago Board of Trade grain markets look set to ignore conditions in farm country and focused on Wall Street in the coming week. 
    Grain traders, like all financial market participants, are being affected by tighter credit, down-sizing by squeezed hedge funds and other big speculators, and worries about global demand for commodities being slammed by global recession.
    Corn and soybeans finished Friday near one-year lows while wheat prices fell to the lowest in 16 months as stock markets around the world continued to plummet. It was just a few months ago when all three hit record highs as hot money flowed into grains and other commodities on an outlook for strong demand and tight stocks for raw materials from grains to metals.
    Trader commitments data on Friday afternoon from the Commodity Futures Trading Commission showed large speculators finally turned net short in CBOT corn and soybeans in the week ending Tuesday, Oct. 21, after weeks of exiting long positions.
    In CBOT wheat, big speculators further expanded their net short position.
    It’s a global “margin call” — and global liquidation, as Rich Feltes, senior vice president and director of MF Global Research, described the recent market activity last week.
    No one seems to care that the corn harvest of the world’s largest producer is running at least two weeks behind, a factor which usually supports prices in the autumn. 
    November is fast approaching and not even half the U.S. crop is out of the fields. Chicago traders estimate USDA will report in its weekly update on Monday afternoon that roughly 40 percent of U.S. corn is harvested, versus the seasonal average around 70 percent by late October.
    But who cares when stock markets around the world continue to ratchet lower and erase trillions of dollars in paper wealth as fears spread. A credible solution to the world credit crisis continues to elude world leaders and, meanwhile, a flight to anything by U.S. Treasury securities and government-insured bank and money-market securities seems to still dominate.
    On the NYSE, traders sighed in relief on Friday when the Dow Jones Industrial average closed only a little more than 300 points lower, recovering from an early 500-point drop. So all eyes among CBOT grain traders will be on what happens in Asian markets tonight.
    If Wall’s Street fear index — the Chicago Board Options Exchange Volatility Index, is any indication, hold on tight.
    The VIX <.VIX>, a leading indicator measuring the change in an S&P stock index price over a given period as a percentage, soared to a record high of 89.53 on Friday, sending more investors fleeing as far away from risk as they could get.
    Grains didn’t escape the maelstrom.
    Futures sank. But the most interesting indicator of the grain markets’ jangling nerves was seen by the spike in corn options volatility. CBOT December corn options volatility soared to 57 percent by the close, up 7 percentage points on the day. That compares average volatility of about 30 percent at this time of year when corn prices typically work to season lows as vast new supplies are harvested and move to elevators.
    “You would expect vols to be up during the summer when crop yields are under question. It’s unheard-of to see these levels in the fall when we’re in the midst of harvest,” said one CBOT  broker with numerous commercial grain firm accounts.
    The last time he could remember volatility this high was in 1988 when the U.S. Corn Belt was threatened by drought losses.
    So grain traders remain as distracted and unnerved by outside factors as all other U.S. and world markets. Add a fresh factor to the mix: news on Sunday afternoon in the Midwest that U.S. helicopters and commandos attacked a farm inside the Syrian border with Iraq on Sunday, killing eight civilians, according to Syria’s state television.
    Another twig added to what seems a witches’ brew for the markets. It all adds up to one thing for grain markets starting on Sunday night: the roller coaster ride continues.

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