My Opinion Of Why The Markets Dropped on Friday
Feb 19, 2011
I have been in Louisville all week at the National Farm & Equipment Show, and was bombarded with questions yesterday about why the markets broke so hard Friday.
It seems most analyst wanted to blame it exclusively on China cutting their reserve rates, but there may be a little more to it than that.
IF you remember on Thursday the markets rejoiced on news that China's Ministry of Commerce was asking others inside the Chinese government to consider potential cuts in import taxes on a variety of agriculture markets.
The story out of China is that they are hoping to encourage imports from other nations. Let's hope that is actually their motives. Consider the following.
From what I could gather they are talking about lowering bean oil duties from 9% down to 5%, lowering soybean duties down to 1%, etc.., etc... This would certainly make it more profitable to import grains and help China build back up their inventories.
The market responded in great cheer on thoughts that more US beans, corn, and wheat will be exported to China. I hate to play devil's advocate, but something just doesn't seem right. Rarely does China make this type of "general" statement with no direct action or specifics. What if China's underlying intention from this announcement is to spook their domestic producers into selling their corn, beans and wheat ASAP... before the onslaught of imports flood their country.
Essentially they kill two birds with one stone. They lower their domestic soybean prices on news of greater supplies hitting the ground (in the short-term), and they scare the hell out of their own farmers forcing them to panic and make sales immediately (which could cause some short-term pressure on the markets).
Those of you who follow my daily newsletter know that I have been reporting on massive farmer hoarding problems in China for sometime, and in particular how the Chinese government has become very frustrated because the farmers have been reluctant to sell them their grain. As a farmer you can imagine how you might feel if the US government announced they were wanting to open up the flood gates in order to start importing massive amounts of corn, beans, and wheat from South America, in turn flooding our domestic market with massive supply. I am sure this announcement will hit home in a hard way with many of the Chinese farmers, and I would have to imagine they may quickly start selling more grain. This could initially cause a wave of selling and drive prices lower, ultimately though it flushes more supplies from the farmers hands and brings China just one step-closer to one solution "importing massive amounts."
It certainly makes you stop and think about the Chinese motives and if it will spark a new wave of domestic selling, that in the short-term could pressure their domestic prices and provide them with enough supply to squeeze by for a little longer... Certainly something to think about.
If the move however proves to be genuine, China will join the ranks of other countries who have been forced to cut import duties in order to battle domestic food inflation. I have even heard Taiwan is now thinking about cutting their "sales tax" on food such as corn, beans and wheat to help cut consumer cost.
They can play all the games they want, ultimately they are going to run out of short-term options and will have no choice but to import massive amounts of grain...the question is how long can they continue to hold out?
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