Is the massive Chinese purchase of U.S. corn a sign of better things to come?

By Doug Tenney, Leist Mercantile

To date, the huge rains in the Yangtze River valley in China have been in the press very little. In early July, up to 30 inches of rain fell in a 7-day period. This region is not a major corn and soybean production area. The Three Gorges dam had been built mainly to generate electricity but was expected to mitigate catastrophic flooding.

However, on July, 14 a huge U.S. corn sale did grab lot of press headlines. On that day USDA announced China had bought 1.7 million tons of U.S. corn. It was the third largest U.S. corn sale in history along with the largest one-day sale to China. Disappointingly, corn closed down three cents.

Hot and dry weather in August could provide price fireworks for soybeans but less for corn.

The July 10 USDA Supply and Demand Report (WASDE) was a vanilla report with little fanfare. The report itself was not a huge price mover with old crop corn ending stocks higher due to ethanol demand reduced 50 million bushels. This was not a surprise to the market. USDA has been reducing ethanol demand in steps and not a huge decline all at one time. From March to July, corn used for ethanol has declined 575 million bushels. The market is already expecting another decline in corn used for ethanol with the August 12 report. Those weekly reports quickly showed the reality of seeing multiple monthly declines. The weekly numbers in early March showed 105.3 million bushels of corn used for ethanol production. Just 7 weeks later it reached a year to date low of just 53.7 million bushels of corn used for ethanol.

However, grain prices on report day fell as a result of 2 week non-threatening weather forecasts and not bearish report numbers. December COBT corn fell 12 cents while November CBOT soybeans were down 10 cents. Just days earlier, the June 30 Acres Report was a much welcomed bullish report, which is rare for this report. December CBOT corn on that report day closed at $3.50 1/2, up 16 cents for the day. The low for the year was seen just days earlier at $3.22 on June 26. It then reached a high of $3.63 on both July 1 and 2. The summer rally quickly fizzled as of mid-July.

Much of Ohio and other parts of the Midwest had experienced up to a 12-day streak of 90-degree highs or more during late June and early July. Those days, along with the bullish acres report mentioned above, provided an all too brief price rally for corn and soybeans. Many producers wanted to see fall delivery cash prices for corn reach close to $4 while soybeans above $9 were desired.

While the corn rally in early July was disappointing, there were some fireworks with the huge corn short positions held by the funds. For months, funds had been short corn and added to their positions on the price declines seen from March into June. Those shorts were close to record levels as they reached 297,000 contracts in early June. Weather uncertainties which followed into early July forced them to buy back a good portion, but not all, of those shorts. A major reason for December CBOT corn never getting higher than $3.63 is that the buying activity was not resulting in new long positions established by the funds. Instead, they were just less short than they had been weeks earlier. Open interest was shrinking in corn, not increasing. Mid-July the funds were short just 133,000 contacts.

 

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