China Controls Corn and Soybean Markets

November 19, 2010

Corn and soybean prices are controlled by China

With no signs indicating a curb in China’s corn demand, there’s going to be reasons to take the market higher. But with weak economic news coming from that country this week, it shows exactly how much control they have over corn and soybean prices, says Jerry Gulke, president of the Gulke Group.

They are the big customer for major U.S. crops.

"China has been the driving force in our soybean economy," Gulke says. "They can make us or break us and that’s not good. I’d much rather see five or six China’s, so if one had a hiccup, we wouldn’t have a problem."

It was likely a small hiccup we saw this week as corn closed about 13 cents lower and soybeans closed almost 70 cents down for the week, on negative news about China’s economy. The Chinese government’s announcement last week that it intended to raise interest rates in order to curb inflation was the driving factor taking prices lower then. This week that rumor was confirmed this week as rates increased ½%.

Gulke Audio: China Controls the Markets

All this, Gulke believes, may be an indicator that a bubble is forming in China’s economy. Those fears are what he believes took the market even lower as the market closed out the week, at or near contract lows.

"One of the things that caught my eye this week was their stimulus program. What China did was increase more stimulus spending a percentage of their gross national product than anybody in the world. They stopped this economy from going any further downward and it stopped it in its tracks. Then what happened, they started getting some if this inflation back and some of that money migrated into commodities.

"Suddenly they’ve got inflation coming and they’ve been dumping reserves into food. Now they’re talking about a ½% increase in interest rates. I ask myself, what would happen to our economy if we raised interest rates now. Well, it would be a disaster. China solved their problem and they’re doing what we hope to be doing down the road a ways."

On the brighter side, unless you’re a U.S. livestock feeder, China doesn’t appear to backing away from its interest in foreign-grown corn. Markets shot higher on Monday as rumors, later confirmed, surfaced that Argentina was sending 500 million tons of corn there. Gulke says this reminds a lot of when China entered the soybean market in a big way.