Current Marketing Thoughts
By: Kevin Van Trump
Kevin Van Trump has over 20 years of experience in the grain and livestock industry.
Why The Chinese Drought Could Be So Important...Read All To Understand!
Feb 09, 2011
The bulls in the wheat market seem to be licking their chops in regards to further confirmation of one of the worst droughts in the past 60 years. Yesterday the U.N. Food and Agriculture Organization stoked the flames by issuing a "special alert" due to a severe drought that is threatening the major wheat producing areas of China. Shortages of rainfall are starting to adversely affect people, grains and livestock. The F.A.O. believes that close to 13 million acres of China’s wheat fields are in some type of jeopardy due to the recent drought or lack of snow coverage. They have also estimated that well over 2.5 million people and closer to 3 million head of livestock are facing extreme water shortages. The fear now is that if the drought continues and or temps begin to fall the situation could be devastating. Rumors right now in China are that President Hu Jintao and Prime Minister Wen Jiabao have made trips to the drought stricken areas and have now called for "all-out efforts" to cope with the water shortages. To deal with such problems the government has allocated $15 billion to support farmers, increase irrigation, subsidize fertilizer, pesticides and fuel. Those on the ground are telling our sources that in many areas the ground is so dry that trees and houses are coated with topsoil that has blown off parched fields. The obvious question is how will this impact the US? With all the secrecy that surrounds China’s agriculture production it is difficult to know for sure. What we do know is that China’s wheat industry accounts for more than one-sixth of all global production, and while China has been known to shut itself off from the world, if they are forced to import wheat in any major capacity wheat prices in the US will skyrocket. Most of my loyal followers will be quick to point out that China's wheat crop is around 80% irrigated, and that this is not that unusual to see long periods of dry weather this time of the year in China, therefore this may not turn out to be such a significant ordeal. I urge you this time around not to be so quick at coming to this conclusion and that you may want to reconsider taking this one step further. Let's assume the drought doesn't absolutely destroy the Chinese wheat crop and that it makes it through the dry period producing satisfactory yields. Along the way however countries in the Middle East become spooked or nervous about all of the news and fear surrounding the Chinese drought. They are worried that if China is forced to import wheat it could leave them empty handed. I am certain with the political tensions flaring and food inflation skyrocketing, being left with little or no grain is not an option. To completely avoid the possibilities, countries at risk might be forced out of the game as the stakes are raised. Those who have been waiting for a pull-back may be forced to jump on board "now" rather than taking their chances of battling it out with China for the wheat. Understand the drought itself may not have to cause major damage to the crop to significantly rally prices. Please don't look past this, it is a major deal so don't let others tell you it is not.
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