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GrainAnalyst.com Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. GrainAnalyst.com is a division of Cytrade Financial, L.L.C. Sign up today!

The grain market is primarily driven by weather and this year is no exception. Prices rallied sharply in June following widespread flooding in the Midwest, strongly reducing corn and bean production prospects. Improving weather this month stopped the rally, especially in corn, which has now given back almost half its June gains. Beans have fallen also from their late June/early July highs, but less steeply than corn.

If you cannot view the Daily Continuous Corn chart, go here.

If you cannot the Daily Continuous Soybeans chart, go here.

Despite weather's paramount influence on grain prices, other factors can have a very significant impact on grain prices. These factors include USDA programs, domestic and international politics, and energy and economic policies in the US and abroad. For example, the sharp hike in energy prices and food costs this year has provoked Washington to contemplate new laws to address and attempt to "correct" these sharply higher prices, if only to pacify voters in an election year. The Commodity Futures Trading Commission has been instructed by Congress to curb "excessive speculation" in various markets, especially crude oil. Various measures have been proposed, including raising margins sharply, restricting the size of positions hedge funds and others may take in the market, and tightening loopholes in current regulations that govern swaps. (Hedgers are exempt from position limits in the futures markets. A swap is a trade by a hedger for another party who is subject to position limits, thereby circumventing the position limit restrictions.)

Some US Senators have proposed banning pension funds from investing in the commodities markets and significantly increasing governmental regulation. These restrictions could apply not just to the grain market but all commodities including energies, metals, softs, and livestock. Fortunately, these extreme proposals have been dropped.

Still, the commodities market remains a contentious issue in the US Congress. Senators have urged the USDA to let set-aside land out of the Conservation Reserve Program and back into production. There have also been demands for changes in Federally-mandated biofuel policies, mainly the ever-growing use of corn to make ethanol and bean oil to make biodiesel fuel. These policies have been increasingly blamed for rising food prices, which the USDA disputes, claiming only a very small fraction of the food price increase is due to sharply increased biofuel production. The intended effect of all these proposed changes would be to push commodity prices lower, taking public pressure off government officials and politicians.

About 25% of the US corn crop is used to make ethanol while a sizeable percentage of US bean oil is turned into biodiesel fuel. This has caused corn and bean oil to become strongly influenced by the direction of the crude oil market. A good illustration of this influence was shown on the morning of the July USDA supply/demand report, which was essentially neutral to negative for the grain market. Nevertheless, with crude oil up around $5 a barrel after rallying several dollars a barrel the day before, corn and bean oil started sharply higher, pulling all the grains up as well. Later that same morning, when crude oil's gains were cut in half, the grains all sold off sharply to trade lower for the day.

If you cannot view the Intraday CLQ8 chart from July 11th, go here.

If you cannot view the Intraday SQ8 chart from July 11th, go here.

Yet another prominent influence on the grain market is the strength or weakness of the US dollar. A strong dollar is usually bearish for grain prices as it reduces foreign buying power when buying US grain, priced in dollars on the world market. A weak dollar is therefore bullish for grain prices since it will require less foreign currency to buy the same amount of dollar-denominated US grain.

If you cannot view the Daily Continuous US Dollar Index chart, go here.

Events overseas have a strong impact on the US grain markets. Two years of drought in the Australian wheat belt have helped push US wheat prices to all-time highs. China's demand for US beans continues to increase due to the rapidly growing Chinese economy and improved living standards. This has contributed to rising US soybean prices. This year, soybean farmers in Argentina have staged an on-again, off-again strike against a higher bean export tax imposed by the government. The farmers refused to sell beans for export and blocked roads leading to export terminals. Argentina is the largest meal and oil exporter in the world. The US bean complex was driven higher as export business in beans, meal, and oil switched from Argentine to US or Brazilian origin. Last week, the Argentine Senate voted to repeal the higher bean export tax, clearing the way for a return to normal conditions in the Argentine bean market. This could result in increased bean, meal and oil exports, which have suffered for months now due to the uncertainty surrounding the farmer strike.

Grain export policies also have a major impact on the market. China used to export up to 10 million tonnes of corn a year, mostly to neighboring countries including South Korea and Japan. Chinese domestic demand has grown rapidly along with their economy over the last several years, however, requiring them to cut back progressively on corn exports. So far this year only 110,000 tonnes has been exported. Taiwan and North Korea were the only recipients; Taiwan for political reasons, North Korea for humanitarian aid. Many market observers think China will become a net corn importer within a few years. China's absence from the corn export market and their probable future emergence as a corn importer has significantly boosted US corn export volume and driven up corn prices.

Over the past year, a long list of big grain exporting countries have sharply limited or totally banned exports of various grains, causing US and world grain prices to climb and, in some cases, skyrocket. India and Vietnam stopped exporting rice, helping send it to an unbelievable $25 per hundredweight. Russia, the Ukraine, and Argentina banned wheat exports, helping drive prices to all-time highs over $12 a bushel in Chicago and twice that in the Minneapolis spring wheat market. Argentina also banned corn exports, helping lift this market to record highs. Several of these countries have now ended or relaxed their restrictive grain export policies, causing prices to decline sharply in several cases.

Currently, the USDA is considering releasing Conservation Reserve Program acreage early, which would increase winter wheat planting this fall and corn and bean planting next spring. Depending on the details, this could have a strong bearish influence on grain prices. The USDA recently announced a program allowing haying and livestock grazing on some CRP acreage but the National Wildlife Federation is suing to halt this program. The lawsuit could delay any USDA decision on early release of CRP acreage but when a decision is eventually announced it could impact prices significantly.

All these factors contribute to price movement in the grains but weather will remain the main market influence for at least the next few months.

Work the markets like a floor trader!

GrainAnalyst.com Floor Analyst Vic Lespinasse takes you INTO THE TRADING PITS with on-going reports all day. Direct from the CBOT floor to your email or mobile device! Vic Lespinasse has been analyzing commodities for 35 years and is recognized as an authoritative commentator on the markets with literally hundreds of appearances on all major television networks and radio stations. GrainAnalyst.com is a division of Cytrade Financial, L.L.C. Sign up today!