How Much Will a Chinese Slow Down Affect Grain Demand?
Oct 20, 2011
I wanted to touch on something with you producers, the belief that a slow down in China will have no real affect on overall soybean or corn demand, but rather only be geared towards a setback in "industrial materials." This is what many analyst are writing and actually telling their customers, be careful with this. To some extent I agree with this analogy, but let's look a little deeper into the trade. Yes, Copper, Crude Oil and Soybean imports have fallen from their pace set in 2010. Falling import data, overcapacity in the real-estate sector and fading demand for Chinese goods abroad, has many analysts speculating some tough times are ahead for China. Again, I’m not saying we should panic, but even a moderation in growth is troubling and worrisome for the global commodity markets, as traders have been "placing large bets" for months on Chinese demand continuing to rise rapidly over the coming years. In terms of demand for soybeans, I--along with many other analysts-- highly doubt structural growth or demand will take much of a hit despite setbacks in exports and real estate...people still need to eat! We have talked in length about the population shifts and rise of the "middle class," higher incomes and the demand for higher protein diets. In my opinion, despite China's ripples, this transformation will continue to take place...regardless. The big story therefore is obviously industrial materials and energy use, not corn and soybeans. However, after years of China gobbling up resources including copper, gold, aluminum and oil, commodity bulls are starting to get nervous about even the slightest sign or reduction in the Chinese appetite. Commodity producers really can’t rely on another big government stimulus like the one that China used to boost demand back in 2009. Higher inflation (or fear of creating even higher inflation) and massive debt now on the books in many areas will limit Beijing’s ability to alter monetary policy. Again, this is definitely something the larger players are watching, so we have to carefully keep our eye on Chinese demand as we move forward. Even though I highly doubt it will affect overall "long-term" corn and soybean demand, we have to realize fund traders liquidating positions or scaling back in other markets may force reallocations and therefore spill over over and directly affect the corn and soybean markets. My point is, don't believe the analyst who are telling you a slow down in China will not affect corn and soybeans. As we have learned during the past few years, these markets are all highly correlated in some capacity or another. Fundamentally the corn and soybean picture may not actually change one iota, but as large traders adjust their portfolios, corn and soybeans may helplessly fall victim. In these waters, just remember, no one market is insulated or safe from ancillary market destruction.