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10-17-2013 07:10 AM - edited 10-17-2013 07:17 AM
I wrote this for you folks. If you would, let me know what you think of the information. Thanks.
With the U.S. corn market trading in the mid-to-low $4.00 per bushel range, and projections of an all-time record crop coming out of the fields, the obvious question is whether the market drops into the $3.00 range.
It might but not for long, says Terry Roggensack, co-owner of The Hightower Report. And he gives not just one, but three, reasons why the corn market will not trade consistently at the $3.00 per bushel level.
"I think this $3.00 corn talk is crazy," Roggensack says. "And, I know that not many people are of that opinion. But, we think China will buy a lot of U.S. corn."
Generally, the $3.00 per bushel corn talk revolves around the U.S. ending stocks reaching a 2.0 billion bushel mark, in this marketing year. Therefore, if the U.S. continues to see demand setback, knowing exports reached their lowest levels this year since 1973, large corn ending stocks will be problematic for corn prices.
However, Roggensack says that it is important to remember that it is not normal for the corn market to go way under the cost of production, especially when global supplies are not sufficient.
"For instance, the last time corn traded in the $3.00 per bushel range, and even in the $2.75 level, the cost of production was "way down there."
To further his point, the Chicago-based research analyst looks towards China's cotton buying habits as a big reason why the corn market has limited downside.
In the last three years, China's government has been buying cotton from their producers. They import cotton for daily domestic use while storing the cotton produced in-country, he says.
After three years of this process, China has built up 591-days of supply (61% of the world's cotton), in its Strategic Reserve Fund.
Ultimately, the program supports their local farmers while the government accumulates supply.
"This is a fact. I'm not making this up," Roggensack says.
So, what happens if the Asian giant does this same hoarding with its corn supply?
It's well known that China is a net corn importer, producing 215 million tons while using 220 or more million tons annually.
A 591-day supply of corn for China would equal 362.8 million tons. With 53.0 million tons on-hand now, China would need an additional 308.00 million tons of corn, to reach a 591-day supply of corn, he says.
"That's 12.12 billion bushels of corn," Roggensack says. And right now, USDA's latest estimate shows China importing 7.0 million tons of U.S. corn. And that number was set when corn was trading at $6.00. So, I with corn now in the $4.00 range, I wouldn't be surprised if China buys 40.0 million tons."
Roggensack adds, "I'm not saying China will import 308 million tons of corn. But, they did with cotton."
The current price of corn favors China importing U.S. corn. "Today, China can buy U.S. corn at a 25% discount compared to its domestic market. This is why I don't see U.S. corn going to $3.00, because China can buy a lot of corn," Roggensack says.
CHINA'S U.S. HOLDINGS
Meanwhile, because it is not earning much, China is getting nervous about the amount of holdings of U.S. Government Treasuries.
"If China moves just 1% of their U.S. Treasury holdings to buy corn, that would equal 2.7 billion bushels of corn," he says.
COMBINED WORLD STOCKS/USE
The third reason the U.S. corn market will be protected from a $3.00 downside movement involves insufficient world supplies of corn, soybeans and wheat.
After charting this year's estimated record world production of corn, soybean and wheat, the stocks-to-usage ratios still show the supplies are not going to be sufficient.
Historically, the stocks-to-use ratio reached 39% in the 1980's, when plenty of world combined grain was lying around. In 2010, the combined world stocks/use ratio dropped to 24%, and last year even lower at 19%.
USDA's latest estimate for 2013-14 combined world grain stocks is 21%.
"That figure could go to 22% or 23%. But the point is that we are only a few points off of the lows," Roggensack says.
In the end, the Chicago-based researcher is not ruling out a corn market that dips below $4.00 per bushel. "I have $4.22 as a price where we bottom. Maybe we print $3.85, as we price in less ethanol. But, I don't see the $3.00 corn price reasoning," Roggensack says.
10-17-2013 07:33 AM
Lets see THEY just raised their credit card balance limit...
That = more printing of money (or at least paper) The price of real things
will be priced accordingly.
gold is up big time this morning. same amount of goods and real things out there
just will take a little more # of $ to aquire them.
Kind of like watering the booze, Prices of commodities should respond accordingly to a point too.
10-17-2013 08:08 AM
It's an interesting piece and raises questions about people's reasoning.
He says they'll store corn because they store cotton. Rats might bess up cotton but don't eat much. I'm not sure I agree that China will store lots of corn long term.
China wants to hold hard goods not currency. OK, his guess.
Low world corn stocks. Maybe. I'd have liked to seen some more discussion of how the users pay for and get the corn to reinforce this argument.
If an analsyt looks at the forest, everyone says that is too big a picture and it doesn't tell anything. If the analyst looks at trees we say he is focused to tightly and overemphasizes individual aspects.
He forgot to put in the fourth reason. Some - maybe most - farmers will weld lthe bin door shut before they sell $3 corn.
10-17-2013 08:33 AM
I agree with most of that assessment, and particularly with the thought that China doesn't want paper US dollars...they want hard assets. Whether it is Iowa farmland, Smithfield Foods and Hogs, other companies, Natural Gas rights, or cotton and corn.
10-17-2013 08:56 AM
China has its own severe debt problems.
Although it is impossible to tell how any progression of monetary mayhem might affect grain prices- either way. So I wouldn't want to get too certain about anything.
On $3 corn, I don't think so barring extreme financial turmoil.
The one thing that I'm 100% sure of is that even though the market has done a good job of training people to hold there are times to make forward sales. Historically, using a drought to get some forward selling done has always been a good move.
Wish I had more 2014 sold but over time incremental disciplines will keep you out of trouble even if they don't make you rich. There will be rallies to sell going forward and they're actually easier to sell when your first ones are above the market. And if you're no more than 40-50% before the crop is made you can live with it if it goes bad.
PS. As far as China goes, how do you know what to expect from a not very transparent economy where the entirety of growth appears to be sustained by evicting people, the local government selling the land to developers for huge profit, then building developments with very low occupancy but which the wealthier class seems more than willing to buy as a place to park their money?
Call me old fashoined but thinking pinning too high of hopes on that game seems unwise. Think I'll play it close to the vest.
10-17-2013 09:12 AM
Of course I'm the guy who was certain that the practice of giving no money down mortgages to unemployed people with a pulse, bundling the mortgages and and selling them as AAA bonds to German insurance comapnies and Norwegian fishing villages surely couldn't last past 2005 or so. Of course it ran hotter for almost 2 years and didn't crash for another.
Point being that things that can't go on forever won't but they can surely go on a lot longer than you think.
10-17-2013 10:53 AM
I think that Terry was bored out the --- rear -- and just needed something to writ about - Lets see here -- Being that just about every T-shirt or pants or what ever --- has Made in China on it - it would make great since to have a reserve of ?????????????? he product you make T-shirts and pants or what ever on hand -- right ? Isn't that how they pay the bills ? = Export business - better to ship than receive . But his reason of stockpiled cotton and corn ?? Come on here Terry - Thats like me saying that we will stock pile 2 billion bu.s of Blueberries - becasue we have 2 billion of extra corn -- i'm sorry here but a ROTFLMAO
What ole Red said makes more since than that garbage that Terry wrote about - they would be buying something physical !
I cracks me up to here people with out a hands on clue talk about things that they don't have a clue about to start with ! -- like 73 prices of inputs being way down there -- way down there huh ? so was the price for corn too - this is 2013 - not 1973 - and when did the market start worring about the price of production being to high for what we get paid ? I don't think I have ever read FC Stone , Informa , or any others writ that corn is to cheap and it needs to go up buck a bu. to help us out -- lmao
I can only hope that Terry get's off that ditch weed he has be tokeing on - OR that the USDA go's back to work so he will have some to read about instead of writing dumbchit .
10-17-2013 11:43 AM
Basically this piece completely aligns with my general views regarding China, and the same is true of the long term supply and demand patterns. Those are the most fundamental of fundamentals.
The reason for China's reserves is all about 'national security' from the POV of China. It's not a matter of owning 'assets' for financial security.
It was not too many years ago that China's wheat reserve was OVER 100 MMT! More than the annual production of N America. And the reserves have more than one function. One is to control domestic prices using strategic auctions to increase the risk to hoarders that try and hold supplies off the market to capitalize on later price spikes.
The second function of China reserves is to minimize the effects of crop failures - at home and globally. The China reserves act as a flywheel keeping domestic markets and global markets from fluctuating wildly. If China had to go to the global market and purchase an additional 5% - 10% of its grain and soy needs in one year the global marketplace would be in shock and awe. And the results might not be pretty for everyone involved. The reserves minimize the effect of crop failures, which will come, sooner or later. And what if that need came the same year we had a failure in the Black Sea area (not uncommon there) or when 2007-8 wheat type markets occur (that was a market failure)?
North American farmers are often too focused on N America to pay attention to the more important global aspects and foreign policies and their cumulative affects. JIT delivery was all the rage prior to 2007-8. The result reinforced the idea that reserves, especially for some countries, is worthwhile to protect political, social and economic stability - in other words, 'national security'. Foreign countries keep an eye on global inventories for that reason.
10-17-2013 12:20 PM
In reference to the Chinese economy and the hand wringing of how they're going to dump our debt.
With a flagging recovery, probably much more concerned about keeping the yuan down but certainly can't pass getting a few licks in when the US has a kick me sign stuck on its posterior.
No real reason to think that anything short of a sharp credit contraction would change Chinese food strategy. Aslo no reason to think that they're ready to roil global commodity markets and import more inflation just to play monetary games with the US.