“There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.” — Frederic BastiatWhenever there’s a big commodity run threatening national security, the Masters of the Universe try to take expedient measures for short-term benefit. In this case, the toadie CME stepped in after the close on Friday and raised margin levels on corn, soybeans and wheat by a whopping 37 percent.In eyeballing spec positions, one can see that because the trade is lopsided, this should be effective in taking the sail out of soybeans, and wheat. However in corn’s case, the small specs were actually already slightly short, and the commercials only moderately short. Indeed the Monday after the margin move, corn is barely down.Barring the sudden appearance of significant rain, corn doesn’t look like a market that will be liquidated to any great degree. Keep in mind that many corn farmers are short at $5 a corn bushel, and have little if any crop to deliver. Therefore, raising margin requirements on these farmers when they are already financially stressed, has the “unintended consequence” of forcing them to buy back their futures contracts. That may explain the firmness in price, even after a big run.The crop report on Monday was another disaster, with 45% of the corn crop graded very poor or poor, up from 38% last week. If the ultimate crop checks in at 13o bushel per acre, given current demand (use for ethanol) that means 2012/2013 ending stocks will be negative 500 million bushels. If the drought continues two more weeks into August, then the Iowa and Nebraska crop gets scorched and we could be talking about the need to ration a billion bushels! The Iowa crop at 40% very poor and poor now looks largely scorched, and Nebraska is at 33%.corn:Iowa July 3Iowa July 17, no rain and high temperatures since;That means it is a good bet that the EPA will need to lower the additive mandate for gasoline. Even $5.50 prices were wrecking havoc on ethanol production and margins.Rather than corn, the best trade on the drought should be RBOB (gasoline) if we saw a retracement of the recent rally. Here I would key on the October futures, and enter if it retraced 38% of the recent move back to the early July 2.42- 2.46 price pennant. Gasoline is in an unstable place, with little room for shocks, and that would include geopolitical developments (Iran, Syria), as well as large scale corn (ethanol) rationing.Natural gas prices have staged a recovery almost exclusively on the back of the very hot summer. Gas on hand is still 470 bcf about the five year average. However dry production is still running 4% ahead of last year, which will tilt the supply-demand angle back upwards once weather normalizes. Sure we could get two more months of extreme heat, but I am not that impressed with the fundamentals here (although it is not really shortable).
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