Market Insight: Moving back to fundamentals

While agricultural futures markets remain volatile, the wild style of trading due to totally non-fundamental forces
seems to be behind us for now.

The massive inflow of speculative investment into agricultural
futures that came in January and February following the stocks and equities crash in the U.S. and
the subprime mortgage crisis is not so much in play these days, nor does it seem likely that such a
large degree of non-commercial buying will come back into agricultural futures markets, in the

short-term at least.

The change in investor sentiment in agricultural futures is due largely to the “global food crisis” and the media’s sudden widespread, steady coverage of it. Additionally, financial problems faced
by commercial players, weaker technical signals and overall less bullish fundamentals are more in
play today than a few months ago. And it now looks possible that the Commodity Futures
Trading Commission (CFTC) regulates institutional investors out of the agricultural futures if the
big money doesn’t choose to move elsewhere on its own.

For the buying interest in Prairie crop markets to re-appear to the same degree as was seen in
early 2008, we’d probably need to see a major weather problem coupled with a resurgence of the
biofuel movement or some other major demand-side development that we don’t know about yet.
A weather problem on its own probably won’t do it and the chances of the latter two factors
coming into play are slim. As was often said throughout the winter, “these prices won’t hold

forever but we won’t be going back down to the low prices of two-three years ago, the markets will
stabilize at a higher threshold,” which is where I think we’re at today.

Obviously prices are going to fluctuate wildly throughout the growing season but the point is that
we expect to trade the weather from here on in primarily. Export figures, domestic consumption
and other fundamental issues are being more closely watched and translated in daily price moves
now than we were seeing in March. While it’s disappointing to have prices down off recent highs,
it is also a bit refreshing to be seeing the markets function again, and to have prices reflecting the
forces that we are trained to watch and incorporate into our strategies and decisions.

Insight: Markets trading sideways

Most grain markets have spent the last month trading in a sideways range, although daily
volatility has remained high. The combination of weather concerns, tight supply and
demand balances, and help from record-breaking energy markets have provided a solid
foundation for commodity crop prices that should hold until 2008 yield prospects become

more sound. But, the threat of increasing production once crops are planted and
established and some ongoing rationing of demand at this year’s historically high levels
are keeping prices from breaking out to the upside.

Corn futures are trading primarily in response to U.S. Midwest weather, which cleared up
enough last week for farmers to make significant planting progress. This has caused some
of the weather premium to erode, but with emergence in Monday’s USDA Crop Progress
report coming in at only 26 per cent, compared to 56 per cent on average, we expect the market to
remain on edge. This year’s delays risk pushing the critical pollination phase back into
the heat of summer, and increase the chances of frost in the fall.

Soybeans continue to gyrate in response to the latest rumour from the on-again-off-again
farmer strike in Argentina. Canola remains stuck in a relatively tight range, supported to
some degree by strength in soybean oil and strong crusher demand, but struggling to rally
due to a sluggish export market and the fact that canola oil is still relatively high priced
on world markets.

Wheat has bounced off recent support levels on a combination of technical short covering
and some early concerns about dryness in Australia. Expectations remain for a large
global crop to be harvested this year, but the need to rebuild stocks means there isn’t
much room for production disappointments in key growing regions.

— The FarmLink Market Insight was researched and produced by FarmLink Marketing Solutions, a marketing advisory service for Prairie farmers, and is published here with permission of the authors. Brenda Tjaden Lepp is the co-founder and chief analyst for FarmLink Marketing Solutions.

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