World: Grain futures in 'dangerous' era of volatility which could last for several years

The growing interest in grains futures markets has pushed them into a "dangerous" era of volatility which could last for several years, Agrimoney cited one of the leading commodities commentators.

Dennis Gartman, who has taught Federal Reserve bank examiners on derivatives, said that crop markets were returning to the "violent" conditions of the early 1970s and 1980s, when daily trading ranges for grains will "dwarf anything we've seen in the past decade or more".

"We shall have to get used to the fact that we will see daily ranges in wheat of $0.50-0.75 a bushel, instead of the $0.05-0.10 we've grown accustomed to in the past 20 years or so," he said.

Price movements are going to seem "quite random", while the spread between brokers' bid and offer prices will "grow dramatically wider" to compensate for the risk of trading in such volatile markets.

Russia's wheat crop failure of 1972 became known as the "Great Grain Robbery" after the country bought up nearly all America's exportable grain supplies that year.

In the early 1980s, farm commodity markets' high profile led them to be the financial market of choice for the blockbuster film, Trading Places.

Key to victory

The key to exploiting such fast-moving markets was in playing gaps between near and far-term contracts, rather than in outright long or short positions, he added in his Gartman Letter report.

The "grain fortunes" of the early 1970s price spike, which was prompted as now by a failed Russian crop, were made "by understanding the term structure of the grain markets, and remembering just how violently far these term structures can move".

Mr Gartman recalled historical examples where nearby soymeal had traded at a premium of $100 a short ton to the next lot. On Tuesday afternoon, Chicago's spot August soymeal lot was trading at a $12-a-short-ton premium to its successor contract, for September delivery.

Spreads between new crop and old crop wheat topped $2 a bushel in Chicago, compared with the current $0.17 a bushel gap between the September 2010 contract and the September 2011 lot.

"We are returning to those great days. It will be exciting and it will be dangerous," he added.

'Buy on weakness'

Mr Gartman added that, in wheat, the bull run in Kansas's hard red winter variety had "only just begun in earnest", adding it should be bought on retreats back to trend levels identified by chart analysis.

"Be patient. We'll get that weakness eventually," he said.

Mr Gartman started his commodities career in the early 1970s in the cotton market, before becoming a futures analyst at Chicago's AG Becker in 1977.

He was a registered Chicago Board of Trade broker until 1985, two years before he started the Gartman Letter.

11 August, 2010