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Corn and Soy Bean Prices are Headed Lower…for Today

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March 27, 2008 – Comments (6)

Watching the price of grains lately has sort of been like riding the Scream Machine at Six Flags Great Adventure, up, down, up down.  We started off on a huge bull run with the price of corn, wheat, and soy beans hitting record levels...not just hitting records, shattering them.  For goodness sake, prior to this year spring wheat futures had never traded over $7 per bushel and they have been trading in the $20s.

Then all of a sudden wooosh, someone pulled the rug out from under the prices of most commodities, like oil, natural gas, grains, metals.  They all tumbled.  We're talking 5% to 10% per day.

Just when things looked like they were going to get really bad in grains for bulls, the farmers strike in Argentina started to make the news.  This definitely is an interesting turn of events. I am very curious to see who caves in first, the Argentinean farmers or the government.  Chances are that this is going to get ugly.  As one would expect would happen after a supply disruption like this, the price of soybeans started to go wild.  Corn is being impacted as well and it went up along with soybeans.

About an hour ago the rumor that the Chicago Board of Trade is going to raise its margin requirement for corn and soybeans was confirmed.  Although I haven't seen anything in writing yet, I heard on CNBC that they are going to increase the margin requirement on corn by 50% and on soybeans by 50%.  If this is the case, a number of traders are likely going to sell and wel may see the price of grains drop again today.

Long term though I am very bullish on grains.  Any drop in price that is caused hedge funds and other traders unwinding positions as a result of the new margin requirements is probably a good buying opportunity.  The reasons behind why the prices of grain are increasing, like the ethanol boondoggle, increasing demand from emerging markets, and now the strike in Argentina, still remain.  And this isn’t even taking into account the possibility of a drought in the U.S. this summer.  If the weather is unfavorable, the prices of grains are going to explode.

Deej

6 Comments – Post Your Own

#1) On March 27, 2008 at 10:12 AM, Toddq34 (< 20) wrote:

Deej,

 I am with you big time, Do you have any ticker symbols for me to watch?  Great reading here, thanks a ton.

Todd

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#2) On March 27, 2008 at 10:35 AM, TMFDeej (99.24) wrote:

Thanks Todd.  I'm glad that you enjoyed my post.  I have not personally been trading commodities, though I know people who do.  I usually stick to stocks in individual companies that I believe stand to benefit from major trends that I can identify.

I wrote a blog post about some of the ag plays that I like earlier this month.  Here's a link if you're interested in checking it out:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=40565&t=01001019292467236494

DBA and MOO are two ETFs that should benefit from rising grain prices.

Deej

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#3) On March 27, 2008 at 10:49 AM, Toddq34 (< 20) wrote:

Deej,

Thank you so much for the info and the link. I live a very rural area, and commodities are always of great interest to me.  Thanks again.

Todd

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#4) On March 27, 2008 at 11:46 AM, TMFDeej (99.24) wrote:

You're welcome, Todd.

Deej

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#5) On March 27, 2008 at 11:53 AM, leohaas (31.21) wrote:

"For goodness sake, prior to this year spring wheat futures had never traded over $7 per bushel and they have been trading in the $20s. Then all of a sudden wooosh, someone pulled the rug out from under the prices of most commodities, like oil, natural gas, grains, metals.  They all tumbled.  We're talking 5% to 10% per day."

True. It is called speculation. The doomsayers are telling us that commodities will continue to go up, whereas the optimists just see another bubble developing that must deflate. These two forces cause the volatility.

I am neither a doomsayer nor an optimist, so I don't know where this will all end. For the forseeable future, I think volatility will reign. Judging by the negativity in many posts on CAPS, the community apparently thinks the end of the world as we know it is near...

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#6) On March 27, 2008 at 2:28 PM, TMFDeej (99.24) wrote:

Thanks for the comments everyone.  Keep them comin'. 

Here's a little more background on why the CBOT increased its margin requirements.  It is raising the daily trading limits tonight from 20 cents to 30 cents on corn and from 50 cents to 70 cents on soybeans. Wider trading ranges require more margin money to protect the exchange.  Despite the more stringent margin requirements that were implemented, we may end up seeing even more volatility in these commodities which have frequently closed limit up and limit down in recent weeks.

Deej

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