Work the markets like a floor trader!

Illinois Grain Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. Illinois Grain is a division of Cytrade Financial, L.L.C. Sign up today!

Many commodities markets have experienced explosive rallies over the last year with several shooting to all-time highs. Crude oil is around $100 a barrel, gold is threatening the $1000 per ounce level, and soybeans are in the teens. The CRB index, a broad measure of the commodity markets, hit all time highs virtually every day over a two-week period from late February through early March; proof that it isn't just the grains reaching historical levels.

Some of the bullish factors in grains are relatively new but others have been building upward momentum into the market for a few years. They are combining now to drive the grains ever higher.

There are many salient bullish influences acting on the grain market. Over the past two years, drought in Australia cut the wheat crop there in half, while poor output forced India to import millions of tonnes of wheat. Factors affecting supply have impacted countries around the world, driving wheat prices to all time highs in the process. Russia has severely restricted wheat exports over recent months while Argentina has restricted both wheat and corn exports in an effort to control inflationary pressures on food and to ensure adequate domestic supplies.

If you cannot view the Monthly Wheat Chart, go here.

Chinese government officials have reported that a severe winter damaged 40% of their rapeseed acreage, sharply boosting their need to import more US and South American soybeans and soybean oil. China's Commerce Minister announced recently that China will increase imports of major agricultural products to meet a growing demand and to tame inflation. Rising standards of living are also contributing to the increase in grain importation by China and other countries including India.

China's annual parliamentary meeting revealed a significant shift of emphasis this year regarding food, from a policy of striving for self-sufficiency to one of relying on more imports as well as restricting exports, especially corn. This policy change had a bearish impact on China's Dalian grain futures prices but was bullish for prices elsewhere, including the US.

China had been a major corn exporter until the latter half of 2007, when their corn exports dwindled to practically nothing. This has shifted corn export business to other countries, particularly the United States. South Korea previously filled much of its import requirements with Chinese corn but increasingly, is now turning to the US to meet its vast needs. Furthermore, South Korea had always bought non-genetically modified corn for its food needs which had been readily available from China. With China absent from the corn export market, however, South Korea has been forced to tentatively start importing genetically-modified US corn for food, illustrating just how tight the world corn market has become without China.

If you cannot view the Monthly Corn Chart, go here.

China is in the process of building strategic stockpiles of beans, bean oil and palm oil, helping to drive these markets relentlessly higher. The upcoming summer Olympics in Beijing might further increase Chinese grain import demand while curtailing grain exports.

If you cannot view the Monthly Soybean Chart, go here.

The US dollar has fallen sharply vs other major currencies, particularly over the last year. The dollar reached a record low vs the Euro and a three-year low against the Japanese yen recently, giving a boost to foreign buying power in dollars and enhancing US grain exports. At the same time, the strength of Brazil's currency, the real, has made Brazilian bean exports less competitive in the world market against US beans and the weakened dollar.

Index funds are always long. Those in commodities roll long positions forward from one futures month to the next indefinitely. The explosive growth of commodity index funds in the last few years has been a significant part of the rally in grains, energies, and metals. The success of these funds has attracted investors that never ventured into commodities before. Calpers, the California Public Employees Pension System, is the largest pension plan in the US with assets of well over $200 billion. Calpers made an initial investment in commodities last year of $450 million, diversifying their portfolio. The strategy worked so well that it was announced in February Calpers would increase their investment in commodities to $7.2 billion over the next two years! Since Calpers is considered a leader among pension funds, others are likely to follow, bringing even more money into commodities, including grains.

Commodity index funds are being fueled by their extraordinary performance. While the S&P grew less than 5% last year, the five largest funds returned nearly 30%! Continued profits of this magnitude could see tens of billions of dollars shifted out of equities and into commodities. With index funds trading only from the long side, commodity prices could be driven even higher.

Very tight supplies are also exerting a strong bullish influence on grain prices, increasing the need for favorable weather this year to boost production. There is little margin for error with US wheat stocks near 60 year lows, while stocks of other grains, including soybeans, are likely to tighten significantly over coming months.

Oil at $100 a barrel is encouraging the shift of grain products from food to fuel. Much of the US corn crop is now used in the production of ethanol while a significant percentage of US soybean oil is being processed into bio-diesel fuel. The USDA predicts, and Congress has mandated, increasing usage of these fuels in years to come, which will keep upward price pressure on corn and bean oil.

Spring wheat, corn, and beans are locked in a battle to secure adequate acreage this season. The fight for acres could have a synergistic effect on these markets -- when one rallies, the others must keep up, sparking ever greater price strength in all three. Spring wheat was leading the acreage race until recently, trading at almost $25 per bushel in Minneapolis before setting back.

La Niña weather patterns are associated with below normal rains. Parts of the US, including the western Corn Belt, remain in a La Niña pattern currently. Several prominent climatologists are predicting La Niña rain patterns through July, the critical month for determining corn yield. Below normal rain in the western Corn Belt could result in below normal yield for the corn crop.

Weather often determines a turn in the grains from bullish to bearish. The current season of Australian wheat has benefited from La Niña weather, which so far has brought ample rains to the country's wheat-growing regions. A 25-million tonne wheat crop is anticipated this year, or even more, roughly double the size of the two previous drought-stricken years. The Australian Bureau of Agriculture and Research Economics currently estimates their wheat crop at 26 million tonnes vs just 13.1 million tonnes last year and considerably less the year before. A crop this big would allow Australia to aggressively export wheat to other countries, exerting downward pressure on world wheat prices.

Farmers around the world now have a major price incentive to grow as much grain as possible. The bull market in grains could be replaced by a bear market if weather is normal. High crop production could rebuild depleted stockpiles and drive prices down.

Very high prices for corn and bean oil could trim their demand in the future and result in little to no profitability for the US biofuels industry, thereby pressuring these markets.

The USDA could allow tens of millions of acres of idle farmland in the Conservation Reserve Program back into production next year, sharply boosting wheat, corn, and bean acreage and production.

Considering all these possibilities, bullish influences are likely to continue to dominate grain prices near term and perhaps even longer, especially if western Corn Belt rains are below normal this summer. Inevitably, normal weather will return and prices will fall. This doesn't mean we are headed back to those halcyon days when consumers (not producers!) enjoyed low-priced grain and cheap food. Prices will fall but only in relative terms. The era of $6 beans, $3.50 wheat, and $2.50 corn is likely gone forever, replaced by new "normal" levels -- just guessing here -- of $10 beans, $7 wheat, and $4 corn. In more ways than one, it's a brave new world, forcing consumers and producers to adjust accordingly.

Work the markets like a floor trader!

Illinois Grain Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. Illinois Grain is a division of Cytrade Financial, L.L.C. Sign up today!