CROPS

The drought and crop losses occurring in the Midwestern United States have reached the mainstream headlines.

There are feature stories running in national publications and on prime-time television with photos of devastated corn crops in Il- linois and Indiana. The dry heat of the last few weeks has cut potential corn pro- duction by at least a third overall, but radically more in some states.

As a result of this harsh weather pattern, prices for all grains have risen. Corn is up $2.12 per bushel (+41 percent), Soybeans jumped $1.60 (+11.6 percent ) and Chicago wheat has gained $2.35 per bushel (+38 per- cent), all in less than a month since June 15.

Soft red winter wheat, traded in Chicago, is sensitive to corn prices because it competes as a feed for animals. The big price gains are not because of wheat crop losses, as this year's wheat harvest has moved along well, and yields are good so far. White wheat grown in the Pacific North- west is mostly exported, but the contract price for white wheat delivered to Portland during August and Septem- ber has been pushed higher by corn's sponsorship as well, with a $1.50 per bushel (+22 percent) gain to about $8.23 as of Tuesday morn- ing, July 10.

Things to remember about the market: The fu- tures market is named ap- propriately because it anticipates the future prices based on information available today. It is normal for the fu- tures price to over-shoot the "correct" price when there is an event of this magnitude. This causes a reaction back in the opposite direction that sets up a "whip-saw" pattern of wild highs and lows in close succession. It is a very frustrating and potentially dangerous pattern of price behavior for traders.

The job of the futures market is to balance supply and demand. There is not as much demand at higher prices as there is at lower prices. This is what keeps the market from being com- pletely irrational. In the case of a large event like the cur- rent weather market, at some point reality asserts itself, usually well after most mar- ket observers have given up trying to identify when that is. In the end, the price has to be set where the buyers can buy. Meanwhile the emotion and momentum will dominate the price behavior.

Wheat prices in this event are almost entirely dependent on corn and soybeans, and have already exceeded ex- pectations. When corn finally reaches whatever top is com- ing (and it is coming), wheat will be the weakest of the grains. The remaining part of this rally will not be easy to capture, but the trend is up for now, so for wheat owners patience is still the key.

Information and opinions contained herein come from sources believed to be reliable, but are not guar- anteed as to accuracy or completeness. The risk of loss in trading futures and/ or options is substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital.