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MARKET ANALYST

By Staff | Feb 13, 2009

Speculation in markets to some observers equates to manipulation, typically providing them with a convenient scapegoat to blame when markets go somewhere they don’t want them to go.

Some also see public-traded markets as parochial territory that should be limited to participants in those physical markets, excluding investors, i.e. funds.

They would eliminate speculation and its perceived linked partner, manipulation. The unintended consequence is that such limits would depress investment interest, restraining market dynamics and liquidity to non-functional levels, but those facts appear irrelevant to them.

Many suggestions for adding more regulation to public traded markets, in my opinion, are designed to be more manipulative than the manipulation that they are intended to solve.

One such suggestion made by R-Calf USA was a prohibition against speculative short selling. They, of course, are focused on the cattle market, but the principal would be universally applied. They believe that only those that own the physical commodity or have bought futures contracts should be allowed to sell.

I don’t know if they intend to seek the same limits on buyers. The concept of the futures market is to allow producers to establish a value of their product by selling futures contracts to provide the economic basis for them to justify producing the commodity.

In terms of the chicken or egg, the market comes first. Packers are legitimate hedgers. R-Calf USA wants to ensure that the live cattle futures market is heavily dominated by physical hedgers.

In doing so, however, the regulation they suggest would suffocate price discovery and market functionality.

It takes two to tango and several to make a market. Without the speculator to take the opposing position of the hedger, no futures trade will exist. The concept of all trade being conducted between hedgers is non functional. The speculator has historically been long commodity futures providing hedgers someone to sell to. The speculator is the commodity producer’s friend.

The market won’t work without them. Speculators are not going to operate in such a confined space that they can be trapped by market regulation.

R-Calf wants limits set on speculative positions imposed by the physical hedgers. This was an unusual suggestion. I guess that the hedgers get to arbitrarily decide how many others can participate in their market.

They essentially want control in order to “manage” the market. R-Calf has no experience that I’m aware of in manipulating the cattle market so I am surprised that they think they are skilled and competent enough to manage one.

I contrarily am confident that they would screw it up, no offense to R-Calf. Market regulation is somewhat of an art to achieve the balance between letting markets freely derive price discovery or suffocating them to a degree that they become dysfunctionally useless.

This starts with your basic assessment of the job public exchange traded markets are doing. I see problems, but nothing close to justifying the kind of oppressive control that R-Calf suggests.

They want daily limits on cattle futures reduced and cash settlement abandoned reverting to physical delivery.

These suggestions are absurd. Limits are set to allow the markets room to function yet protect the financial integrity of markets. Current limits are appropriate.

Cash settlement eliminated the manipulation that occurred with physical feeder cattle delivery. Cash settlement was a good solution to basis alignment, not the problem, and should be extended to the live cattle contracts. We would be better off if grain markets were cash settled, too.

R-Calf is so obsessed with the possibility that speculators may sell to depress cattle prices that they are willing to concede to oppressive regulation that would ensure too little market participation would exist to support price discovery.

We need funds to balance the commercial short selling. The lack of balance R-Calf suggests exists today is greatly exaggerated. Over regulated, the futures market will not work.

If producers used public exchange traded futures markets instead of feed the packer’s captive supply, the cattle market would improve. Expanded use of the futures market is one of the solutions to captive supply.

Packers use of captive supply to manipulate cash markets far exceeds their ability to use public exchange traded markets to do so. Most of the problems that I see from derivatives have been in the over the counter off exchange trade.

By contrast, exchange traded derivatives, “by setting margin and collateral requirements, would remove risk from the financial system and increase transparency in instruments.”

By establishing limits of OTC traded derivatives thereby pushing them to be transacted through clearing houses, the Commodity Futures Trading Commission gains the ability to oversight the trade.

For those who don’t want commodity prices to go higher and want to limit trade access to those seeking to profit from a market trend, they see regulation as a way to stack the deck.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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MARKET ANALYST

By Staff | Feb 13, 2009

To make your trading profits increase, follow these 10 trading rules and never deviate from them.

1. Trade with the major trend. Trading against the major trend is like trying to swim upstream or like trying to catch a falling piano. Both can be painful and trading against the trend can be expensive. Define the major trend and trade in that direction, never trade against it and watch your profits soar.

2. Write down your plan. You should define very clearly how you will select, enter and exit every trade prior to entering it. Use whatever strategies you wish, but never deviate from your plan.

3. Learn to love your losses. This doesn’t seem to make any sense, however this business doesn’t make sense most days. Everyone will have many losing trades in their career, so instead of dwelling on the losers and letting them get you down and ruin your next trade, learn from each and every trade you put on and vow to improve from each trade.

4. Don’t pick tops and bottoms. Let the market be your guide in trading commodities, you don’t have to try to out guess it. It will tell you when a top or a bottom has formed, so respect the market and let it speak to you. It my years of doing this business, I have never sent a check home to anyone for picking a top or a bottom on a consistent basis.

5. Use stops. Many traders don’t want to use stops because of the fallacy that the market will try to pick off their stops. Or they are afraid of getting stopped out only to watch the market turn and move with out being in the trade. If you are trading with the major trend, place your stop at a point that the trend would change to avoid getting randomly stopped out. It is better to be out of a trade and wishing you were in, than to be in a trade and wishing you were out of it.

6. Avoid over-positioning. One of the most basic rules in investing is to diversify. Don’t trade all of your capital in just one market or in one sector. Spread out your risk and diversify.

7. Maintain objectivity. In short, don’t become emotional about your positions and never make decisions during the course of the trading day. Always make your trading decisions, develop your trading plan, after the markets are closed.

8. Don’t discuss your positions. Avoid talking about your positions as they can anchor you into a position and make it hard to exit. The more people you talk to about your trading, the more married you become to your positions.

9. Take responsibility. You must live with your own trading results, so take personal responsibility for your trades. Blaming someone else only hurts you in the long run. Winners in trading and in life take full responsibility for their actions and grow from the good and the bad experiences.

10. Trade to make money. You can’t hit the highs in every market and you can’t mark the lows, but you can make money if you follow your plan. Don’t worry about getting out to soon with a profit, you can always reenter and there will always be another trade. Ultimately your goal should be to make a profit, not pick the tops and bottoms.

Corn

Corn closed the week 1 3/4 cents lower. The weekly export sales report showed net sales of 1,164,200 metric tons – a

marketing-year high – were up 5 percent from the previous week and 74 percent from the prior 4-week average.

Increases reported for Japan (552,800 MT), South Korea (203,800 MT), unknown destinations (125,000

MT), Mexico (85,200 MT), Egypt (67,000 MT), and Venezuela (30,800 MT), were partially offset by decreases for Taiwan (23,900 MT), Jamaica (18,300 MT), and Trinidad (4,000 MT). Net sales of 51,900 MT for 2009/10 delivery were for Mexico (50,000 MT) and Japan (1,900 MT).

After making marketing year lows in export sales for three consecutive weeks, export sales have rebounded to post three consecutive weeks of marketing year high export sales. For the marketing year, corn sales are 53 percent behind last year’s demand pace. The USDA has only exported 979 million bushels of corn compared to 1.864 billion bushels last year. So despite the 3-week rebound in demand, the overall demand pace remains bearish.

Export demand is slow and the ethanol industry remains unprofitable with crude oil under breakeven values of $50/barrel. The double bottom that is evident on the weekly charts acts as good support and will hold through the planting season.

Prices will move sharply lower if this support is broken.

Soybeans

Soybeans closed the week 21 cents higher. The weekly export sales report showed net sales of 336,600 MT, a

marketing-year low, were down 36 percent from the previous week and 64 percent from the prior 4-week average.

Increases for China (166,900 MT, including 115,000 MT switched from unknown destinations), Japan (82,900 MT), Germany (76,300 MT, including 70,000 MT switched from unknown destinations), Egypt (45,000 MT), and Mexico (38,900 MT), were partially offset by decreases for unknown destinations (127,000 MT). Net sales of 2,300 MT for delivery in 2009/10 were for Japan. This year’s export pace remains well above last year’s pace as the U.S. now has export commitments for 898 mb compared to 886 mb a year ago.

Weather in South America remains a major concern with Argentina experiencing its worst drought in history.

They have received some beneficial rains over the last week with a wetter 6-10 day forecast. This has pulled soybeans off of their double top highs at $10.40. This resistance will only be broken with a resumption of the dryness in South America.

Soybean meal has been the upside leader as Argentina is the world’s No. 1 exporter of soybean meal.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.

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