Higher Margin Requirements Won’t Dent Ag Bull

By Chip Hanlon | March 27, 2008 | 3:08 PM | 2 CommentsTweet This

This morning's announcement that CBOT was raising margin requirements on corn and soybeans is a mild negative, but perhaps not in the way one might think.

The initial reaction might be to think this will bring down grain prices by reining in speculators; as a result, soybeans and corn were down this morning, albeit just slightly (as I post this, soybeans are off less than 2% while corn is actually back up marginally).  In fact, this will put little lasting downward pressure on agriculture commodity prices because we strongly believe this has been a bull market built on fundamentals, not speculation.  Indeed, it is a rare occurrence in the commodities world when speculators can prop up a market for anything other than a short period of time; the march of higher ag commodities prices has been so broad and sustained as to suggest quite clearly that it has not been the product of speculation.

The way this margin increase becomes a small negative is this: it will now cost more for growers to hedge their production, but this will likely affect smaller growers the most.

And looked at in a slightly different way: this does make it more expensive for speculators to play in the agricultural commodity space.  If prices don't come down measurably as a result of this change, it will strengthen the bullish fundamental case for this sector by showing that speculators didn't drive up prices in the first place.

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Interesting, Different Angle http://globalcapital.blogspot.com I was expecting a huge drop in grain prices today, but didn't see it. I wondered why, and you may have the reason. I was anticipating another series of limit down days, like we saw a few weeks ago, followed by a big surge to the upside. I completely agree. Grain storage stocks world-wide are at multi-decade lows. Wheat in storage hasn't been this low since World War II -- 60 years! Go grief, we could see a famine if the U.S. has a bad harvest. The Ag bull will continue to build! Submitted by sbenard on Thu, 2008/03/27 - 4:14pm » reply |

thanks Thanks, Steve...appreciate your comments.  -CH Submitted by Chip Hanlon on Tue, 2008/04/01 - 12:07am » reply |

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