Economic policy may have more to do with corn price movement

[jrsiajdranch]

Here is something else to chew on. I still say it is all about the dollar.

19:05 UK, 7th January 2011, by Agrimoney.com

US bigger threat than China to commodity prices

The US, not China, represents the biggest threat to the economic conditions which have gusted commodity prices higher, UBS has said, flagging the risk presented by a change in central bank policy. Concerns that China, a huge buyer of raw materials, would come down hard on inflation this year - cramping economic growth and demand for commodities with it - have been assuaged by the release of official economic targets for 2011. Chinese authorities said they were aiming for economic expansion of 8%, growth in money supply of 16% and inflation of 4%, 1 point higher than last year, "all higher than consensus policy expectations", according to the bank. "Overall, the China policy announcements over the past fortnight have been benign, and certainly more benign than consensus," UBS said. "This reinforces our view that China will not overtighten in 2011." 'More significant correction'  Concerns that China, the top importer of commodities including cotton and soybeans, would prove over-zealous in its monetary tightening represented a recurrent headwind to commodity markets last year. However, the "biggest threat" to the bullish outlook for commodities was the risk that America might be tempted to ditch its so-called "QE2" programme of economic stimulus, the second round of quantitative easing, and push the sector into retreat. "That would worsen the risk/reward profile – it would turn our dollar fund flows signal from green to red - and a more significant correction would be possible." Such a policy turnaround might be made possible by a string of upbeat data, the bank said, flagging data showing a 17% rise in small business borrowing in November as "the most bullish signal" for the US economy of late. Furthermore, a switch in the make-up of the US central bank's important federal open market committee, with a board change due later this month, "might nudge the committee towards a less dovish tone, and lead them to question whether to continue QE2". 'Bullish environment' However, the bank, which made its comments in a note aimed primarily at investors in miners and hard commodities, said it ultimately remained "structurally bullish". With economic risks moving from deflation to inflation, implying rising costs of raw materials, "it is a bullish environment for commodities and miners".

[clayton58]

Now I'm confused.  We were told QE2 was going to lead to hyperinflation but now backing away from QE2 will cause collapse??  Sounds like a no-win situation.

[Palouser]

This blame game regarding Fed policy and the like and the value of the dollar seems way over done at this point. First it's the Chines bubble that's the threat and then it's the success of the Chinese in managing to slow down the economy w/o breaking bubbles, then giving the $ complete control of commodities and so on. IMO it's way over done. Then starting with the assumption it's 'all one market', etc, as if grain cannot chart it's own course apart from other industrial commodities, etc.

Grain has done fairly well through all the economic upheaval. I think the fundamentals of grain can predict the possible paths that grain is going down in terms of production and demand. Yes, the $ has some bearing, but one can't attribute the price of grain now by the value of the $ other than as a contributing factor.

What is beginning to irritate me is the constant suggestion that any day now everything risks going down the tubes by 'someone's' mismanagement. I don't buy that as a day in day out explanation of the functioning of the physical market. It may be more a matter of a guage of people's frustration at getting caught.

Here's my general outlook going into the report. Last time I said the market would probably gyrate regardless of the bullishness/bearishness of the last report, and has a history of making a counter move before fundamentals reassert themselves. That's exactly what happened though the intensity and interval were longer than I expected - BUT - the fundamentals did reassert themselves. I expect something similar around this report, whether of the same intesity I have no idea. HOWEVER, the continuing deterioration of corn in Argentina is a huge physical fundamental at this point and as long as the weather trend continues it will bear down on the market as soon as the report impact dies. Longer range it is all about N American ehnding stocks and the question of where the needed acres for next year's crops will come from. The conditions of the Southern Plains wheat will also have a bearing - regardless of what the $ does.

[GoredHusker]

Grains performed rather well from 1980-1983 even though the U.S. dollar rallied roughly 17%.  Grains have performed rather well from 2008-present even though the U.S. dollar rallied roughly 13-14%.  Grains performed rather poorly by 1985 as the U.S. dollar rallied nearly 40%.  As the Fed stops its quantitative easing policy with the new so called deficit hawks taking the reigns, the U.S. dollar more than likely will rally.  Will it rally 40%?  It's possible especially if China's bubble bursts.  For everyone hoping for a bullish report tomorrow, I think we should all be prepared for what we're hoping.  If the carryout comes in with a five in front of it, everyone should be prepared for some quantitative easing with regards to ethanol mandates.  We're on an unsustainable path with regards to food production vs. fuel production with grains.  More than likely sooner rather than later the policy will change.  It is rather interesting that the vehicles winning vehicle of the year are electric or hybrids rather than flex fuel.  The tide is changing. 

On October 1, 1980 the corn stocks were 1.6 billion bushels while the price was roughly $3.80.  On October 1, 1984 the corn stocks were 722 million bushels while the price was roughly $2.65.  The stocks dropped roughly 55% and the price dropped roughly 30%.  On October 1, 1985 the corn stocks were 677 million bushels while the price was roughly $2.20.  The dollar gained 40% in value during the same time frame as the ending stocks dropped just shy of 60% while the price also dropped roughly 40%.  Historically, grain doesn't fair too well through economic upheaval.  The U.S. dollar has a little more than some bearing on the price of grain.  Those who learn nothing from history are doomed to repeat it.   

[Palouser]

The caveat I have about your comparisons is that one has to take into account the global market as a back drop, not just the N American ending stocks. The London feed wheat price is now about $8.60, which I take to be a solid sign that exportable forms of feed are quite tight.

[k-289]

Kinda like the run up in the beef market---$30 up in1 year on fat cattle--read history back 12-18 months and not 1 expert called this one ? Best thing for me is to stay in ones comfort zone and keep a realistic debt load--