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For the most part people are curious. It is natural to have questions and to want easily understood answers. For example, if it has been raining day after day planting is being delayed and markets have moved higher. So when I am asked, "Why are markets rallying?" I can give an answer that is straight forward and acceptable. But are grains rallying because of the slow planting and flooding? Maybe more importantly, what happens in the future after there has been spring flooding?
I know traders want fundamental reasons to explain why markets rally or drop. Currently, delayed planting with excessive rain are reasons that satisfy most traders. But as I have pointed out, the question is who is buying US grain? With recent cancellations of US soybeans from China and this year's slow exports in corn, the US isn't supplying the world as we did in 2010 through a good part of 2012. On Wednesday May 29 it was announced that China cancelled the purchase of 147,000 tonnes of old crop US soybeans.
If you have read just one of my commentaries in the past mont,h you know I believe spreaders are the largest group of traders. Because spreading isn't a simple answer, but it is the most realistic, especially if you pay attention to what has been happening to open interest, the number of long and short positions combined, along with daily volume, slowly but surely slowing down, you can see traders unwinding trades from the beginning of May where they bought old crop July grains and sold new crop.
Are we seeing traders buying new crop because of delayed planting? It can't be denied somebody is buying December corn and November soybeans over the past week. But paying attention to volume, it is clearly spreading, as traders reverse the July old crop corn and beans where they previously bought and now are selling, along with reversing previously sold new crop and not have to buy to liquidate.
Charts are an eye opener and the chart below of the July/December 2013 Corn Spread clearly shows why old crop and new crop have been so volatile. From April through May 22, buying old crop and selling new crop drove markets. But in seven days the spread has corrected through liquidation and profit taking by over 45 cents.
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