Just one year ago I wondered how we would manage the “black swan” event of COVID-19. We had what appeared to be a global production surplus of 4 million to 8 million acres. I imagined strategic reserves of grains by importers as a common-sense solution, and one that would ease the U.S. burdensome surplus.
How Quickly Times Changed
In late 2020 everyone was asking if China was doing just that. Do they really need all the monster buying, and would that imply a long-term scenario?
Buying begat a bullish market that fueled speculation China was in it for the long haul, and the U.S. might not be able to produce enough of everything
to ward off impossibly short supplies (creating demand destruction as a result). The February World Agricultural Supply and Demand Estimates fired a warning shot at the exuberance.
The market believed USDA had to increase 2020/21 exports by at least 150 million bushels to match the record corn export sales to China. That didn’t happen. World stocks were increased by 3 MMT — and it was all about China.
While China imported more, domestic use was lowered, allowing for the building of domestic stocks. This created a mini black swan: a 7 MMT reversal, which is a big deal when stocks are perceived as impossibly tight.
A New Price Maker
Without a doubt, strategic reserves have come into their own and cannot be ignored as a price maker.
Are we seeing front loading of demand as a result? If so, it might temper the need for a perfect crop to meet optimistic demand. Or, is the master manipulator, China, hoodwinking us again? Did we force them to buy cheap grain while domestic users pay the price?
Last year’s complexity and concerns seem like a lifetime of experiences compared to the dull days of a few decades ago. I’m just a few weeks from planting and doing it all over again, but in an unprecedented global environment.
Global supply and demand are more important than ever. Accurate information is difficult to find, whether it be from NASS or China. Ultimately the buck stops with you and me. Our price discovery and price action are as valid today as they were 40 years ago.
Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group, a market advisory firm. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades. Past performance is not indicative of future results.
