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In This Issue:
Ben Pasulka of MF Global discusses the outlook for the Corn futures market..
March 5 , 2008
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Free Trading Directives Newsletter from MF Global

Corn: The New Cotton?
By Ben Pasulka of MF Global

The grain markets recently have had some of the most volatile swings in recent memory. There are many factors to why this has happened. Many arguments can be made and most of them would provide much credence. In this article, I am going to tell you what has happened in the past in three markets that may seem unrelated, but could forecast the future of the corn market.

(continued below...)


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Over the past two and one half months, cotton has risen dramatically. The range that cotton has traded at for the two years previous to this was in the range of 53.00 to 73.00. However, due to the demand for corn (i.e. exports to China, ethanol, and feed for farmers) many farmers in the south negated cotton and began planting corn to meet the demand. With the rising prices, it made fiscal sense for them to do this. When cotton is harvested, 10 weeks starting the first week of October, there was a monumental shortage. The price of cotton has responded by sky-rocketing, creating all-time highs just over 93.00.

This trend has not stopped, although the grains of choice for farmers are soybeans and wheat, not corn in 2008. Soybeans too have risen to all-time highs. Corn too, has seen the benefits of demand, by making all-time highs. However, due to high prices of soybeans and wheat, farmers have decided to plant those grains as opposed to corn, rice, and cotton. Although corn has much stock, the grain will be depleted by years end, a rise in price for December is eminent.



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One more factor attributing to the current rise in grain prices is the ever-weakening dollar. Most foreign currencies are experiencing unheard of strength against the American dollar. Because Fed Chairman Benjamin Bernanke has lowered the interest rate, it has caused the dollar to become weaker; directly affecting the price of the grains. With a recession looming, even if he does not lower the rate again, which I believe he will to try to stimulate the economy, he certainly will not raise it to strengthen the dollar.

All these factors, lack of acreage, weakening dollar, and verification that depleting stock of grains, will cause prices to rise, have led me to this trade recommendation:

TRADE RECOMMENDATION

Look to buy December, 2008, 6’00 dollar corn calls for 70 cents ($3,500). To make this trade less expensive, sell 2, 8’00 dollar corn calls against it for 25 a piece ($2,500). This will cost only $1,000. I do not believe that corn can rise past 8’00 dollars, even with the enormous current inflation. The reason is it will be too expensive to buy for farmers and countries trying to import it (America plants almost 60% of the worlds’ corn).


About Today's Author:

Ben Pasulka
MF Global

Ben Pasulka began his brokerage career as an equity raiser for MF Global. He worked primarily trading the indices for his full-service clients. He has also traded in the crude oil and agricultural markets. At MF Global, Ben has sharpened his skills over the past two years with the help of more experienced traders around him. He has been studying technical trading books to combine with fundamental trading information to decide which markets are ripe for profit trading opportunity. Ben can be reached directly at 312.528.3274 or via email at bpasulka@mfglobal.com.

View additional market commentary on InsideFutures.com