Signs Point To Continued Strong Chinese Bean Demand

February 29, 2012 12:50 AM

What Traders are Talking About:

* Signs point to more strong Chinese soy demand. Improved domestic demand for soy products in China, especially soymeal, has resulted in positive crush margins for the past three weeks, according to state-run China National Grain and Oils Information Center. As a result, processors' demand for soybeans has increased. And with slight inflows of imported soybeans during the month, port stocks have reportedly fallen to 5.7 MMT from 7 MMT at the beginning of the month. The combination of positive crush margins and declining port stocks suggests Chinese demand for imported soybeans will remain strong near-term. And with ships waiting 15 to 20 days to load in Brazil (typical for this time of year), as exporters wait on new-crop supplies to arrive, the U.S. should continue to get near-term Chinese business.

The long and short of it: Chinese demand for U.S. soybeans is the key to near-term price direction in the soybean market. As long as Chinese demand is strong, there's more upside potential.

* Quiet start for March deliveries. Today is first notice day for March grain/soy futures -- the start of the delivery process. No deliveries were posted against March corn and soybeans, while Chicago wheat had only 3 deliveries and there was only 1 delivery against March meal. For March soyoil, there were 2,025 deliveries.

The long and short of it: The lack of deliveries against March corn and soybeans is not a surprise given the strength in both cash markets. Expectations for Chicago wheat deliveries were mixed, with most expecting few deliveries, while some traders thought up to 500 deliveries were possible.

* Strong demand for ECB LTROs. In an attempt to keep euro-zone banks solvent, the European Central Bank (ECB) introduced 3-year Long-Term Refinancing Operations (LTROs) in December. The first round of "free money," totaling 489 billion euros ($657 billion) was largely used by banks to cover maturing debt. But it's hoped by ECB President Mario Draghi the second round of LTROs, which were snapped up to the tune of 530 billion euros ($712 billion) by euro-zone banks will be used more for loans to businesses and individual consumers in an attempt to boost euro-zone economic activity. ECB officials also hope banks will use the new money to buy higher-yielding bonds more aggressively, especially from Italy and Spain.

The long and short of it: Demand for the second round of LTROs was stronger than expected. This should increase the level of liquidity in the euro-zone and could trigger increased risk appetite, which would be supportive for commodities.


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