traders must acknowledge the China factor
Despite the likelihood of a sizeable
rally in old crop corn and soybeans heading into
the summer, this does not change the bearish surplus
situation that is likely to be seen in the fall.
The biggest issue on my mind is what happens when
those surpluses come? Will we be burdened by over-supply,
widening cash basis levels and heavy speculator
short positions for several years to boot like
we saw in 2009/2010? That is the billion dollar
question. Right now that is the popular conclusion
from almost every analyst out there. The problem
is the analysts may be dead on right about the
fundamentals and dead on wrong about the price
action of corn and beans.
Cotton is a classic example of this.
Last year all the analysts looked at the huge surpluses
coming and all projected cotton to fall to $.50/pound
or even lower. It was a compelling and sensible forecast
and it was absolutely wrong!!!
They all got the burdensome fundamentals
right, but what they failed to understand or comprehend
was China’s policy to stockpile U.S. cotton. As a result
of this, China picked the bone clean from U.S. supplies
and has left a very tight situation indeed. This has
caused a 40% rally in cotton prices in the face of every
analyst expecting lower prices.
One has to seriously look at this stockpiling
strategy and ask this basic question: Did the Chinese
just give us their playbook for corn, beans, wheat and
rice, etc.? Meaning, have the Chinese decided to build
strategic buffer stocks in year of surpluses to be able
to better manage and control critical agricultural prices?
I think there is a very good chance that is exactly
what they plan to do. We may find out that despite a
2 billion bushel expected carry out in the U.S. that
a surprise in Chinese imports being above and beyond
anticipated needs may shrink this number far below this
level and cause other buyers to panic buy in the after
I believe the Chinese were scared to
death about losing control of their agricultural supplies
and seeing runaway prices over the last four years that
they were helpless to stop. I believe they now feel
that going back to the old agricultural business model
which states to always have at least 1 to 2 years of
supply of everything on hand to be able to overcome
a major deficit year and keep a lid on prices is a more
palatable strategy. Time will tell, but this is what
I will be monitoring closely and all of you should be
watching this very closely in the months to come. The
Chinese are not stupid and they cannot afford to run
out of anything or risk revolution.
what this means is that the price lows that come this
fall could be higher than most are anticipating and
may not last anywhere near as long as a result. Food
for thought and these are the kinds of things I think
about in attempting to make the very best forecast possible.
Just remember it is very rare indeed for a wildly accepted
consensus opinion to be proven correct. The bear story
sounds too easy and too solid for it to play out as
everyone expects. I am a bear heading into the fall
with a bull costume waiting in the closet ready to put
on after the post-harvest correction runs its course.