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Tuesday, February 12, 2008


it may be time to exit commodities

a pile of fed rate cuts, a dollar that has been falling for years and an almost-unquestioned belief in the imminent arrival of china and india as consumption powerhouses has bolstered, it seems to me, a consensus that global commodity inflation -- oil, gas, agricultural products, metals -- is inevitable. and maybe it is.

but how many times has something like this happened at what ended up being a good long-term buy point?

Matt Pierce, Futures International Inc. says there is an absolute run on spreads right now. "It's the scariest thing I've ever seen on this floor," Pierce says.

... Pierce, a wheat trader, says people are getting blown out as the March/May carry went from 13 cents yesterday to a 43 cent inverse, overnight.

"There's blood in the water. People are being forced out of major positions. And when you're coming into a market like this, there is nothing there to buy. It's getting out of control."

Because of a lack of sellers in the market, the commercials that got caught short are being forced to bid up the market, Pierce says.

"This is a commercial/supply-side issue right now with a few wheat mills in northern Minnesota completely out of supply. They have no wheat and have had to shut down."

Pierce adds, "There is no wheat no matter how high the price is getting."

Pierce says he knows of some locals in the wheat futures pit that were blown out of spreads yesterday for losses in the millions of dollars.

"The market is getting so high, no one wants to play with it. As a result, we are losing our liquidity," Pierce says.

Meanwhile, Joe Bedore, FC Stone's CBOT floor manager, says one of the problems is that people have violated a golden rule of the trade.

"You should never be short the lead month," Bedore says. "It seems there are enough short positions in wheat that have narrowed these spreads. The effect has moved over into corn and soybeans now."

Bedore adds, "I've seen panic here before, and this is almost worse."

The solution to get the market back to normalcy would be to get the commercials out of the market, he says.

"Personally, and this is just me talking, the commercials will have to liquidate their position or declare bankruptcy. So, the government is going to have to tap the funds on the shoulder and say it's time to sell."

At that point, the commercial will be able to cut its losses and liquidate. "When that point is, I don't know," Bedore says.

wheat futures have exploded and commodities generally have been on a terrifying run. this is a classic buying panic, and may very well represent the blowoff top in wheat. it certainly has some basis in reality, with chinese winter wheat having been crippled by storms and american acerage being sunk into the government-subsidy-fiasco of corn-based ethanol. but gains of this speed and intensity are rarely sustainable.

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