Interesting looking at grain futures over the last week, with speculative money flowing in and out of the market on news of Chinese interest rates and the ongoing concerns on sovereign debit in the EU. Although there was a short term sell off; the true fundamentals remain strong going into 2011.
Fundamentals still play an important role, however speculative money flow is a much more important part of the price structure in grain and oilseed futures than it used to be. Remember when funds started getting into soft commodities during 2007/08, with the futures markets regularly hitting limit up/limit down!
The days are long gone when you can simply focus on production and old crop supplies carry through. Now traders & growers alike must keep track of the above mentioned market fundamentals - both domestically and globally while also closely monitoring the dollar, ethanol mandate levels and the health of many global economies, all while trying to gauge investor’s appetite for risk. As a result, it is becoming a delicate balancing act in the grain and oilseed market and that's creating extreme price volatility (and expect this volatility to continue over the coming months)
While excess volatility gives you potentially historic pricing opportunities, it also increases the daily fluctuations in silo bids and thus general risk. As a result basic supply/demand fundamentals must remain the basis for making long-term marketing decisions.
For wheat, the fundamentals outlook isn't as nearly as strong as say oilseeds (with strong Chinese demand), but it isn't bearish either. With the increasing precipitation along the east coast, the trade will be well bid for higher protein wheat. Also there are enough wheat crop concerns around the world to limit the downside unless there's a widespread commodity collapse. And if those concerns turn into full blow crop problems (Russian and US winter wheat worries?), it would likely be enough to ignite another wave of strong buying in wheat futures.