What In the World Happened in the Grain Markets!?

By: Kevin Van Trump

Today was what we call a "bloody day" in the grain markets with the board lit up with Red. July corn ended Limit-down today finishing at 729 3/4, July wheat ended down 34 1/2 cents finishing at 775 1/4 and July Soybeans ending down 31 cents finishing at 1351 3/4. Throughout the day I have been hearing folks in the media giving out their different opinions on why the market broke so hard. I want to share with you what I wrote in my opening comments in this morning's report. If you are still scratching your head over today's session, I think this will make some sense to you.

With the Fed and their All-Star Mr. Bernanke on the mound yesterday, the crowd was expecting a real barn-burner. Carefully articulated words and crafted thoughts have however left fans leaving the park scratching their heads. In a nutshell, the Feds elected to let QE2 expire as planned, in addition the Fed left rates unchanged and have suggested that extremely low rates will more than likely be maintained for an "extended" period. There was some verbiage and a little more talk than normal about "inflation" and the continued thoughts that inflation is "NOT" an issue. The Fed, and in particular, Bernanke believe the current level of "inflation" is right were it needs to be, and in a sense, I get the feeling this is exactly where they wanted it. Additional comments confirmed that QE2 is still right on schedule to end in June, and that not only rates, but the US Dollar and inflation are not really a major concern into the foreseeable future. In essence, I believe they feel the problems will eventually take cafe of themselves. 

What does all of this mean? I am of the opinion that Mr. Bernanke has a plan and that his plan is going according to schedule. Yes, he would like to see more improvements in jobs, and he would like to see US Housing data improve, but it seems that he is starting to get the ship turned in the right direction. I have learned through the years to listen intently to those who have more experience, education and training. Rather than simply sitting back and arm-chair quarterbacking their every move, and critiquing each mistake, I prefer to try and understand their thoughts and predict their "next" move. Any idiot can talk about what "has" happened, and what they "would" have done, but when given the wheel most would fold in a heart beat. Bernanke has certainly been around the block a time or two, and I am fairly certain he has "forgotten" more about these markets than I know about them. Therefore I am choosing to listen intently rather than criticize. 

Let me give you a brief little rundown on Mr. Bernanke before you jump on the bandwagon and play into the rhetoric that the man doesn't know what he is talking about. Bernanke was in Dillon, South Carolina. From what I am told, his father was a pharmacist, and his mother was an elementary schoolteacher. He has a brother and a sister, and grew up very much just like you and I. During his youth he worked on construction crews, and waited tables. He graduated valedictorian and played saxophone in the marching band. I have read that since his high school did not offer calculus, he learned it on his own. Bernanke achieved an SAT score of 1590 out of 1600, and went on to attend Harvard University were he graduated with a B.A. in economics summa cum laude in 1975. From there he jumped over to the Massachusetts Institute of Technology were he received his Ph.D. in economics in 1979. Bernanke went on to teach at the Stanford Graduate School of Business from 1979 until 1985, and was a visiting professor at New York University. From There he went on to become a tenured professor at Princeton University in the Department of Economics. He resigned his position at Princeton in order to serve as a member of the Board of Governors of the Federal Reserve System from 2002 to 2005. In June 2005, Bernanke was named Chairman of President George W. Bush's Council of Economic Advisers, and resigned as Fed Governor. The appointment was widely viewed as a test run to ascertain if Bernanke could be Bush's pick to succeed Greenspan as Fed chairman the next year. On February 1, 2006, President Bush appointed Bernanke to a fourteen-year term as a member of the Federal Reserve Board of Governors, and to a four-year term as Chairman of the Fed. On August 25, 2009, President Obama announced he would nominate Bernanke to a second term as chairman of the Federal Reserve, bringing us to where we are today. 

I think Bernanke knows exactly what he is doing, whether it plays out the way he plans is another story. I think he honestly doesn't fear inflation because he knows the recent commodity rally and US Dollar weakness is self induced. He believes QE1 & QE2 did exactly what he had envisioned and that was to spark inflation, weaken the US Dollar, and jump start the economy. Obviously with a major goal of turning around the stock market and getting earnings back on track he has done just that. By him not fearing inflation and in fact calling it "transitory" (transitory: meaning existing or lasting only a short time; short-lived or temporary) you have to recognize or read between the lines that he believes commodity prices will not remain at these levels for long. In essence you have to feel that when QE2 ends and with no QE3 in the deck, commodity prices in general may start to ease. With this in mind, I will be looking to make more sales on the rallies and downgrade my overall bullish stance towards commodities as a whole. Do I think the bull run is over? No, I think global "demand" will continue to be a driving force for years to come, but I do however think the self-induced steroid needle will soon be pulled out of the commodity markets arm, and a brief stint in "rehab" may be required in order to deal with the withdrawals. 

 

* I doubt the big boys will stop playing the game "cold-turkey", rather look for them to start easing their way out slowly. You have to believe QE2 will last at least another 45 days. From that point forward the big players could become a little sceptical of further price appreciation and the risk to reward...use your time wisely. 

 

* My friend and subscriber Dean Ohrt over at Heartland Cooperative made a simple but great statement last night. Dean said, "It is important to take some time and have a plan...If you don’t have a price on paper, more than likely your price will never be reached and you will be selling on the way down." Remember my friends; greed, fear and panic. They are always with us.

* In today's trade I would expect poor export sales numbers in corn and beans, and improved weather forecasts for many areas could lean on todays ag markets, despite weakness in the US Dollar and help from the outsides.

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