Grain Traders Remembering Spring of 2004

Grain market traders examined their computer screens early Tuesday morning and found that e-CBOT grain futures prices were solidly lower overnight, coinciding with a big sell off in Asian stock markets (including a near 10% drop in the Shanghai stock market). Then in early open-outcry trading on Tuesday morning, grain futures prices were trading sharply lower. The grain bulls suddenly have a lump in their stomachs. Veteran traders remember that bull market runs in the grain futures in 2004 were stopped in their tracks in April of that year–on news that Chinese government officials had taken steps to rein in their rampant domestic economic growth.

China’s economy has continued to grow at a rate near 10% annually, which has led to a voracious Chinese appetite for the world’s major raw commodities. Indeed, if the Chinese economic juggernaut sneezes, it appears many markets around the world suddenly get a cold, including the grain futures markets.
In April of 2004 nearby soybean futures at the Chicago Board of Trade hit a high of $10.64 a bushel. Then came the China news. By the autumn of that year, prices had fallen by 50%, to $5.01 a bushel, basis nearby futures. Nearby corn futures in April of 2004 hit a high of $3.35 1/4 a bushel. In December of that year prices had backed off to a low of $1.91, basis nearby futures. The news from Asia overnight has not only spooked the grain market bulls, but also other major raw commodities bulls, too. Gold and crude oil futures prices are lower in Tuesday morning dealings. Remember that part of the strength of the grain futures markets recently has been tied to the “outside markets,” especially gold and crude oil, which have seen strong runups just recently, too.
Corn and soybean futures markets had just recently pushed to fresh contract and multi-year highs. The grain bulls can argue that markets are due for a corrective pullback soon, as there has been no significant downside corrective activity in either market since early January. However, any corrective pullback in the grain futures that coincides with any new “Asian Contagion” will certainly test the mettle of even the most stalwart of grain market bulls. A steep sell off in the grain futures on Tuesday will have to find the bulls mustering some strength very soon, to ward of ideas that market tops could be in place.
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