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<DIV>factors to consider in wheat/corn.<BR>1) forget exactly who, but one author
of a previous message to this forum earlier this week grazes on the truth with
observations regarding <BR>harvest timing. Equally important that wheat is
harvested in areas that feed <BR>substantial amounts of grain (Texas, OK, KS,
CO, the Southeast). THe basis <BR>in the summer time for feedgrains must
usually be high enough to draw <BR>feedgrains from Nebraska, IA, MN etc in the
very same areas where the basis <BR>for wheat must be low enough to create
incentive to either store the wheat or <BR>move it to a consuming area or export
point (in the middle of harvest).<BR>2) Wheat can be (and is) fed.<BR>3) Key to
wheat feeding is keeping the relationship at an attractive <BR>relationship long
enough to create incentive for feedlots and other producers <BR>of
"rations" to switch in to wheat (typically 3 to 6 months).
Obviously a <BR>very large "spot" price<BR>divergence will do the
trick (or a more modest divergence over a longer <BR>period of time).<BR>4) Once
switched, $ incentive also required to unswitch.<BR>5) one of biggest risks to
spread is drought risk for corn, after the wheat <BR>crop is made.
(However, this risk is capped by virtue of fact that corn <BR>demand is
inherently elastic -- being fed to animals -- and wheat demand has
<BR>inelastic base (human demand)) In simpler terms humans will never
switch <BR>from wheat to corn but animals will switch from corn to wheat or no
feed. <BR>ALthough I don't have longer term charts in front of me I would
venture that <BR>the spread has historically only spiked in during corn weather
events.<BR>6) Also keep in mind a wheat bushel is 60 lbs, a corn bushel is 56
lbs.<BR>7) Commercials have sophisticated models to take advantage of above.
Recent <BR>action (spread trading in reasonably defined range) suggests that
their <BR>trading may have been a strong factor. -- One could make
argument that <BR>biggest money to be made in spread is actually to wait for the
spikes through <BR>the bottom of recently traded range (a couple of times per
decade?) as either <BR>the amount of money commercials are willing to commit to
trade is exhausted <BR>or they are actually stopped out of their
positions. Although rare those <BR>opportunities are safer than muni bonds
and a lot more rewarding.<BR></DIV>
<DIV> </DIV>
<DIV><BR>just my (thankfully former) commercial personality giving it's 2cts
worth.</DIV>
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</x-html>From ???@??? Tue May 25 18:02:47 1999
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