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- Steven Petillo

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September 7, 2007

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It’s been an interesting ride in the grain markets this season and although we may get some extra volatility caused by world wheat concerns, soybeans and corn should end the season quietly. In like a lion and out like a lamb -- all and all, it has been a great season for grains.

Wheat should continue to be a positive influence in all grain markets. Weather conditions and forecasts in Eastern Europe, Australia and Northern China have not changed much in the last few months. Drought and world supply issues will continue to be a driving force behind record high prices and continued government involvement. Russia recently announced an additional tariff structure on wheat exports and India announced that they will need to import more wheat than originally expected. The big winner for the next season or two will be the US and Canadian producers who have had impressive crops and favorable weather. The next season or two looks no different. As usual, the focus will be on Mother Nature and drought concerns for some time.

Technically, CBOT wheat looks very strong. A small gap under the market should have little influence. The trend remains intact and as long as volume doesn’t falter the market should remain firm. A drop in volume should be the first indication of a coming stall in prices.

Corn and soybeans have had the most interesting spring in years and as we head into harvest, US farmers seem to be pleased with the result. During planting, the market pushed prices to the 430’ zone on weather forecasts for a hot and dry summer and strong ethanol demands. But an increase in plantings combined with an excellent weather season, for the largest producing areas, drove the market back to a near 50% retracement from last seasons harvest prices to current prices. Overly dry conditions in the US’ southeast has certainly taken its toll on crops, but have a minimal impact on the countries expected full production numbers. Recent flooding in the mid-west gave the market some extra volatility but seem to have had only a positive effect on the crops. Besides removing some topsoil, which is not important this late in the game, the recent rains gave much of the mid-west one last good drink before harvest. Illinois and its surrounding states should end up with record crops.

Soybeans gained ground early in the season on expectations of losing acreage to corn, which it has but should reverse itself, for the most part, next season. A recent continuation of this uptrend is probably due to the strength in the wheat market and rumors of root rot in certain areas of the mid-west and rust confirmations in areas of Louisiana, Florida and Texas. It’s important to remember that the rust reports are not out of line with a typical season and there has been no confirmation of major root rot issues. The weak dollar should continue to help exports also supporting the market but 900 beans right now seem a little high to us. Look for a stall in wheat to signal a possible decline in beans.

Also in the news recently, China has turned away shipments of US beans on the basis of ‘quality issues’. This should have little impact on market prices as we are comfortable in assessing that the quality of deliveries has not changed and this is just another game of politics between the US and China. As the two governments continue to debate currency valuations and manufacturing issues, we expect to see more of these political tactics used. This game should have a minimal long-term impact on market pricing.

The weather outlook remains very good for the harvest and since many producers planted early this year we should make short work of the harvest this year. Wheat should continue to be the front runner in coming weeks and traders will start paying closer attention to comments and imports/exports by India, Egypt, Russia and Japan.

Steven Petillo has been in the futures and forex industry since the early 90’s when he worked on the floor at the Chicago Board of Trade. Since then he has been the senior analyst and research director for FCMs and investment firms as well as a regular contributor to a number of different media and think tank institutions.

Mr. Petillo is now the president of Arc Capital Management, a brokerage firm dealing in futures, the foreign exchange markets and OTC markets with offices in Chicago and throughout Texas.

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