Is China Really a "Smoking Gun?"

Published on: 17:17PM Mar 19, 2012


Morning Summary: The "outside" markets seem to be rather subdued, as there were very few exciting "macro" type headlines reported over this past weekend. Moving forward the trade will focus primarily on a glut of US housing data scheduled to hit the markets throughout the week. We have the Home Builders survey out today, housing start numbers out on Tuesday, existing home sales released Wednesday, housing prices reported Thursday, and new home sales out on Friday. 
The only real "wild cards" I see this week could come as several members of the US Fed will be speaking in various locations, and I am sure the topic of QE3 will be of primary interest. I am also thinking we might start to hear more serious concerns and debate regarding an Iranian attack of some sort. The Wall Street Journal is already projecting fuel prices out east will reach $5.00 per gallon in the next few weeks as refineries start to experience some tightness. It will be interesting to see if our economy can keep the train moving down the tracks with fuel prices surging higher! 
Grain and Soy traders continue to talk about "early planting" here in the US, but the trade seems to be even more concerned about whether US producers will get enough soybean acres in the ground to pick up the South American slack. To put it in simply terms, in years when US corn planting gets under way early, US producers tend to just keep on rolling out the corn acres. This has the trade worried and concerned there will NOT be nearly enough soybean acres following the unexpected production failures in South America. As I mentioned on Friday, the trade seems to be thinking we will plant between 74.5 and 75.5 million soybean acres. The analyst though are thinking, with the recent South American losses the world needs the US to plant 3-4 million more acres of soybeans. Many in the trade seem to believe this only happens if soybeans prices can rapidly gain in comparison to every other crop, prompting producers to make the switch. 
Personally, I am hearing very little in the way of producers switching more acres over to soybeans (I think it is too late), therefore you have to imagine the job of the market may soon be "rationing" demand rather than encouraging more acres. Either way soy prices seem as if they need to trend higher, at least until the world feels more comfortable about US production and longer-term supplies. The question then becomes how much higher will soybean prices need to travel longer-term in order to ration demand? How much higher will prices need to travel before the Chinese government starts to dump soy reserves on the marketplace? How much higher will prices need to travel if the Brazil soybean crop actually drops to 64-65 million metric tons like many in the trade are now estimating?  Is that $14, is that $15 or even $16 per bushel...who knows, but I would be willing to bet if the upcoming USDA report on March 30th doesn't show increasingly more soybean acres prices will continue to push higher. 
Looking deeper into corn prices, one may be scratching their head. Traditional thinking would lead you to believe with US planters starting to fire up early and talk of planting running well ahead of schedule, the market should be breaking on fears of additional corn acres and near perfect planting conditions in many high yielding locations. Obviously this has not been the case. 
I believe the trade is grossly discounting the improved US growing conditions in many parts of the Corn belt and choosing to focus more attention on the "Smoking Gun" in China which may be much worse than most analyst had anticipated. I have spoken in great detail about the possibilities of miscounted bushels in China. I have also included a more detailed story in today's "Perspective" section that details Chinese misrepresentation in several other major industries. It is not a matter of "IF" the crop was misrepresented, in my opinion, it is more a matter of by "How Much" it was misrepresented. Some additional rumors starting to circulate are that Chinese farmers, following last years  harvest, were forced in many locations to put corn in the bins much wetter than normal. As you and I know, this could be forcing Chinese producers to fight a much more serious "quality" battle than the trade maybe reporting.  

As of last week corn prices in China had surged to new all-time highs just north of $10.00. Meaning domestic Chinese corn was trading at just over $390 per ton. US corn on there on the other hand (reported by most cash sources) is trading at round $265 per ton. Delivered to the dock, or what many call the landed cost of US corn in China is said to be running about $340 per ton. As you can see, with US corn being cheaper than domestic Chinese corn, every "buying" rumor started is extremely hard for the bears to dispute considering the possibilities. There is some propaganda starting to circulate in the trade however that shows US corn prices trading at a significant premium to corn out of Argentina and Brazil and much higher than corn out of Ukraine. My point is, even though there is a "Smoking Gun" in China, they may be eyeballing or waiting on some other alternatives. Don't fool yourself into believing we are the ONLY game in town. I am still not 100% sold on the "old" crop premium and continue to encourage producers to take advantage of the premium in Sept when making "new" crop sales.                                                                   

Wheat has picked about $0.30 cents in the past couple of weeks as there continues to be some moderate weather concerns both here int eh US and globally.  US wheat continues to remain highly competitive in the global marketplace, and there is starting to be more talk in the trade about the upcoming USDA report showing a much larger wheat "feeding" number. Net-net, despite a glut of world supplies there should be enough bullish news (at least short-term ) to help keep wheat prices somewhat supported through the end of March. Dry conditions in Western Europe continue to be monitored, as well Black Sea wheat becoming more readily available and possibly more competitive in the days and weeks ahead. I continue to look for strong upside resistance in the $6.80 to $6.90 range, and would be thoroughly surprised to see us break through these levels without some very serious "weather" related premium being added.  

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