Is Chinese Soy Demand Being Underestimated?
Nov 21, 2012
It seems the bears are quick to argue that Chinese demand may not be nearly as strong as some have lead on. If you recall many bulls in the trade have been talking about Chinese soybean imports possibly pushing to 65 million metric tons or even higher. From what I can tell, those number are starting to be throttled back and several in the trade are now thinking 60 million metric tons could be more probable. All I can say is just be carful underestimating Chinese demand. I remember last year at this time we were hearing very similar rhetoric, about how Chinese soy demand was leveling off and possibly even tapering back, only to see another huge jump in overall Chinese demand. I am not saying the bears couldn't be right this time around, but betting on a setback in Chinese soy demand has been a losing proposition for the past several years. With tight supplies, no real weather story as of yet, South American logistical concerns and the Chinese "unknowns," it wouldn't surprise me to see JAN13 soybeans trade within a range of $13.00-$15.00 until expiration. My hunch is the 2012 "bull-market" has officially ended, but we may make another push to higher ground on South American weather concerns or logistical issues. The question is where will prices be when the market is all set-up and ready to make that next bull run??? My gut tells me we will be lower rather than higher, so make sure you are positioned properly. On the flip side, soybean bulls were happy to see "Oil World" reducing their soy production estimates for both Argentina and Brazil. From what I hear they cut their latest Argentina estimate by 2 million metric tons, from 56.0 to 54.0 million. Keep in mind this is still significantly higher than the 40.5 million metric tons harvested last year. As for Brazil, they cut their estimates from 82.0 million metric tons last month down to 81.0. Just like Argentina, even though it is lower than last month, it is still significantly higher than the 66.8 million metric tons they produced last year. Moral of the story, this "virtual" pool of "new-crop" soybeans that the trade keeps dreaming about might actually be getting a little smaller as opposed to a little larger. Rather than trying to digest 150 million metric tons (plus) of South American soybean supplies, maybe we are looking at production in the mid to upper 140's. Which would obviously be more palatable.
As for today, producers should be taking advantage of the rallies by catching up on both new-crop and old-crop sales, reducing risk while prices are still at profitable levels. I am still NOT re-owning any previous sales and believe you should continue to keep your hedges in place. Spec's in both wheat and soy should continue to play the game from the sideline. Bull spreading corn continues to look like a good play (CH vs CN), also spreading new-crop corn against the deferred wheat contracts continues to pay. I highly advise against getting sucked into a major bull story right now, there are simply too many outside market headwinds and too many what "if's" in regard to demand. Be smart risk-managers and know when to raise your bets and when to reduce your exposure. If your a "bull" I just don't see these being the cards you want to double down against.
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