Tighter government control over markets (no short selling of major bank stocks) and labor (supporting AIG and Morgan Stanley due to excessive job loss potential) acts as the second method. Both occurred after the pivot point which was a change in underlying supply prices (crude oil) causing profitability to fall as producer prices increase. These factors promote a stagnant economy for the foreseeable future offering opportunities in agricultural commodities as a counter inflationary hedge. In spite of Keynesian beliefs, stagflation can exist with the US economy showing symptoms of said sickness.

As inflation increases so historically does the price of gold. This is a cornerstone of any commodities rally which in turn will promote sector wide growth. This shift offers upside potential to agricultural markets following the recent price collapse due to unwinding of long allocations by funds and CTA’s. These entities had inflated prices beginning with the wheat rally in 2006. The second factor supporting a concurrent or post harvest rally is the updated balance sheet specifically for soybeans. Though fundamentals have taken a back seat, those in the know see tightness in old and new crop soybean ending stocks using current USDA expectations (40 (yield) X 73.3 (harvested acreage) - 2,949 (consumption)). Using these numbers, old and new crop carryouts are less than 140 million bushels respectively. This does not take into affect any yield or acreage loss following hurricane Ike. Just a 1 Bu/Acre reduction in national yield puts supply in jeopardy with ending stocks under 100 million. To put this in perspective, ending stocks in 05/06 were 574 million.

The second supportive factor for soybeans is S. America’s weather and political unrest. Two of the world’s largest soybean producers are looking at diminishing crop potentials versus the USDA’s 113 MMT (Brazil and Argentina) expectation. Any losses will only tighten a world balance sheet further with world ending stocks sitting at 51 versus 62.65 MMT in 06/07. This does not account for any crop problems or changes in currency values during the impending planting period. Planting will commence in earnest in the coming weeks so any price advance during north American harvest will actually diminish long term upside potential. A perfect scenario for bulls is a price pullback during harvest promoting smaller S. American acreage then in response an enhanced technical, fundamental and open interest led rally. Open interest is a major factor with far too few entrenched longs remaining to counter any consumption led rally. With a lack of volume to counter any rush agricultural commodities have the potential to surpass yearly highs in beans with corn and wheat both benefitting from sector and floor momentum. Recently Goldman Sachs stated soybeans are $3.00 under their upside target with wheat $2.00 under and corn $1.00 under. Though balance sheets for corn and beans do not currently support an overwhelming bullish bias they will benefit from the squeeze in soybeans technical momentum and new crop acreage shifts. The best case scenario for corn is smaller Argentine corn acreage due to late wheat harvest, dry conditions and high input costs. The best scenario for wheat is a protein led rally with quality more of an issue than quantity leaving Minneapolis and Kansas City in charge.

In closing, these market remain at the whim of large banks, open interest shifts and sector momentum with crude, gold and the US dollar all leading factors. The opportunity in agriculture markets is to the upside with established risk positions an advised path. Use deferred options (SN9, SX9, CN9 and CZ9) via upside calls and call spreads to establish a long delta and volatility position. With your risk established you can place long term positions in the vault waiting for conditions to turn in your favor. This is an opportunity versus equity investment with the commodity market looking to move back into the forefront of investor’s minds in the coming months.

Disclaimer: Past performance is not necessarily indicative of future results. The risk of loss exists in futures and options trading