The Chinese government revised forecasts for domestic corn last week and indicated that supplies for PRC may have been overstated by as much as ten million metric tons (mmt) or more versus the USDA's forecast for 155 mmt. This was largely due to the drought of its 2009-2010 crop.
Tight supplies, adverse weather, transportaton difficulties and a trade dispute with Argentina, are giving bears pause and bulls confidence as markets expect China to "switch" and ramp up U.S. grain purchases.
Corn prices in China carry an approximate 12 percent premium versus U.S. corn prices. China also resumed selling corn from its state reserves after a four-month pause to cool domestic prices. Nearly 80 percent of the reserves were taken and certain provinces commanded a price equivalent of $7.50 a bushel according to Agrimoney.com.
Chinese officials have no formal announcement as of yet, but the actions stated above provoke speculation that China may be experiencing a corn shortage. If this is true, China will have to increase their imports dramatically. Livestock breeding also increased significantly, so demand for feed grain is also on the rise.
U.S. corn inspections came in at 1.481 thousand metric tons (tmt) which was above the expectations of 850-1,100 tmt. If the export figures continue to surprise on the upside, the bulls will tighten their control.
The trade dispute between China and Argentina involves soybean oil. Argentina currently imposes "anti-dumping measures" or tariffs on certain imports from China such as auto parts, tires and textiles. In retaliation, the Chinese government increased "quality and safety standards" on soybean oil imported from Argentina. Shipping permits from the Chinese government to exporters of soybean oil from Argentina declined dramatically this year.
Even though both sides have tried to tone down the rhetoric earlier this week, sabre-rattling between China and Argentina resurfaced at the Argentina-China Economic Co-operation and Investments Forum. In a nutshell, both sides insist that their trade policies are reasonable and a resolution seems distant at this point in time.
It should be noted that China has been building crushing facilities at a rapid pace and may be more interested in soybeans than soybean oil. Weekly inspections came in at 309 tmt for 2009-2010 and 60 tmt for 2010-2011. Even though this was below expectations, the market expects China to purchases record amounts in May. Chinese soybean purchases are 12 percent higher in 2010 than one year ago.
Trade Ideas:
- Corn
- Reasoning: China may need to import corn may at least provide a floor for prices, even though planting season is underway.
- Recommendation: Sell a June 350 put at seven cents, buy a July 380 call @ 12.5 cents and sell a July 420 call at 5 cents.
- Risk: Exit the short 350 Put if July corn closes below 350 -- Additional option adjustments may be made. Please call me for additional info.
- Soybeans
- Reasoning: Soybeans are in overbought territory, but momentum is strong. The $10.00 area appears to have psychological support.
- Recommendation: Buy July soybeans at $10.02
- Risk: Place a stop at $9.84, or exit if July soybeans close below the 100-day moving average (currently at $9.90).
Carol Hurley is a Senior Market Strategist with Lind-Waldock. She can be reached at 866-790-4371 or via email at churley@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
© 2010 MF Global Holdings Ltd. All Rights Reserved.
Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL 60604.
