My Take On The Current Meltdown Situation

Things certainly look very different to how they did 6-8 months ago don't they? The news on Lehman Bros and Merrill Lynch has provided the markets with another major kick in the cream crackers.

Well, the same people that were responsible for driving these markets up to ludicrously unprecedented and unsustainable levels are now getting the comeuppance. And I for one find it difficult to have too much sympathy.

"A lack of liquidity defines this financial crisis," French grains analysts Agritel said at the weekend.

Adding that "the funds are condemned to liquidate their positions in all markets, including raw materials."

Well, corn, soybeans, wheat and the rest all went through the roof largely ignoring the fundamentals. Who's to say that they won't fall through the floor ignoring them as well?

That certainly seems the case at the moment. The exceptionally tight nearby cash market in soybeans sent expiring September the equivalent of nearly four limit up moves Friday night.

September may have expired but the nearby market is just as tight today as it was on Friday.

But tight stocks and a bullish USDA report (at least for corn & soybeans) released Friday mean nothing when the funds are stampeding for the exit.

How can it be denied now that the invasion of massive volumes of spec money into the commodities markets has been responsible for the wild swings we have seen over the last twelve months?

So where do we go from here? Lower. The shake out in the US is far from over, and the knock-on effects for the grains market seems plain for all to see. We are only halfway through the pain, that's the way I see it.

Sure, the market will over-react on the downside, like it always does, but when is that going to be, and how much lower will it go in the mean time? The bull run up lasted for a couple of years. The last time corn traded below $3 (a previously "normal" level) was Oct 2006, ditto soybeans below $6. Wheat below $4 was Sept 2006. Incidentally the last time London wheat traded below £90 was also Oct 2006.

Will we ever see those levels again? Maybe, maybe not. I can certainly see a further 6-8 months of downwards pressure whilst the large world crops that have just been harvested need to find a home.

Look at rapemeal. You can't give it away. Everybody is bought right up to the max. Sure it's competitively priced relative to just about everything else but who wants it? Nobody. That situation doesn't look like changing this side of May 2009.

Once again, the cure for high prices WAS high prices.