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Grains Market Conspiracy And The USDA Report

Last week I posted on the grain markets. The initial reaction to the USDA crop report on May 11 was a spike down in the price of corn, wheat and soybeans. After all, the USDA report painted a picture of abundant stocks and on schedule planting. Well, as I wrote on May 12, the crop report turned out to be a work of creative art by the USDA. I am still scratching my head and wondering whether there weren’t some ulterior motives with respect to this report.

According to the crop report, corn stocks were higher than expectations. That caused prices to dip down to just under the $6.60 level on the July contract. At that point a funny thing happened. First, China and South Korea turned up as physical buyers. Then the market shrugged off the USDA report and rallied up over 13% to above the $7.50 level where corn is currently trading. Fundamentally, corn and the rest of the grain complex, is looking good.

Linn Group, a commodity research and brokerage firm in Chicago, recently projected that U.S. farmers will plant 89.538 million acres of corn this year, well below the USDA’s March 31 forecast of 92.2 million. Linn also estimated U.S. soybean plantings at 75.094 million acres, below USDA’s projection of 76.6 million. These forecasts from the Linn Group came out after the USDA crop report. My sources continue to tell me that corn planting is well behind last year’s levels.

So what’s going on here?

Well, the market has told us that the grains are bullish, that is crystal clear. Since the initial reaction to the USDA report, corn is up over 13%, soybeans are up 4.5% and wheat is up 12%. It seems that the USDA report didn’t at all reflect the current state of the grain markets.

Remember, in the past two weeks the CME raised margins on silver, gold, crude oil and oil products. This move sent prices lower in all of those commodities. Higher margins have resulted in pushing smaller investors out of these markets. The big boys including Goldman Sachs, Morgan Stanley, JP Morgan and large hedge funds have no problem posting these margins. Smaller investors have a much harder time trading when the cost increases so prohibitively!

Higher margin costs result in lower returns for investors as more cash is needed to be used to participate in the markets. This creates a huge barrier to enter the markets. I have to believe that the fingerprints of the CFTC and government are all over these recent moves. We have had screaming bull markets in commodities for months. The U.S. dollar has been in a very long term bear market and U.S. interest rates are basically zero. Suddenly, the CME raised margins and the USDA comes out with a crop report that does not accurately portray the current state of grain fundamentals—all within a one week period. Wow — how is that for a conspiracy theory?

This is not a conspiracy theory, the conspiracy is a reality!

On March 16, voice in Congress called for an end to speculation in the commodity markets. A group of Democratic senators wrote to Gary Gensler, the chairman of the CFTC. In their letter, the senators said, “Speculators are seizing on recent political turmoil in North Africa and the Middle East to drive energy prices to unwarranted levels… Higher margin levels would reduce incentives for excessive speculation by requiring investors to back their bets with real capital.”

The recent moves by the CME, the USDA crop report and the chatter from Congress all point to the same bottom line. The US government wants to limit participation in the commodity markets. They do not want these markets to operate in a free manner or on a level playing field. The leaders in the administration and congress have no problem with hedge funds, large pools of capital and banks influencing prices. They do, however, have a big problem with investors diversifying their portfolios to take advantage of and hedge from coming inflation and higher commodity prices.

And this is a democracy?

A long time ago the British government found out that when you try to take on market fundamentals and influence markets through tampering with the market mechanism you usually lose badly. George Soros taught this lesson to the Bank of England in 1992.

It appears that he US government is trying to cut commodity prices today by tampering with the market mechanisms. Perhaps they should attack the true root causes of higher commodity prices — the ever-weakening U.S. dollar and a +$14 trillion deficit. Perhaps the US government should wake up and realize that higher commodity prices are due to many macroeconomic factors such as global population growth, an emerging middle class in China and a change in weather patterns. The US government, coming up on an election cycle, is looking for short-term fixes. They are not going to work. Just as the Bank of England learned in 1992, the US government and its regulatory bodies may learn a very costly lesson here.



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