HardAssetsInvestor

Written by Brad Zigler  |

April 29, 2010

Are Grain Prices Finally Ready To Rally?

Details

As China buys up U.S. corn for the first time in four years, how will the purchase affect grain prices in the near future?

• Why China wants U.S. corn
• Can the higher prices continue?
• Will soybeans and wheat also rally?

 

A poorly kept secret has roiled around the Chicago grain pits this month: Traders have been waiting for China to come to the U.S. market for corn for the first time in four years.

And, sure enough, the Department of Agriculture this week confirmed that China had purchased two cargoes of corn - about 115,000 tons - probably destined for a feed mill.

American corn is cheaper than China's domestic price. A lot cheaper. We're awash in maize now, and with plantings 85 percent complete, another bumper crop is likely to follow.

What's more, planted acreage will likely exceed intentions reported at the end of March. Favorable spring weather and rapid planting progress have raised acreage expectations.

The talk among locals is that we're only seeing the Chinese dip their toes now into the U.S. corn market. There's a real shortage of corn in China, owing to drought and cold weather that has slowed planting. In fact, the country's been obliged to sell corn from its reserves in order to keep a lid on rising prices.

This week's purchase could be just a test drive for the Chinese should their domestic production be further curtailed by weather. That prospect's got tongues wagging about the possibility of some 2 million tons in future sales of U.S. corn.

Not surprisingly, word of the purchase buoyed corn prices Wednesday. July corn jumped to $3.64 a bushel, a gain of more than 10 cents, staving off a decline that had technical traders betting on a dip below the critical $3.55 level.

 

CBOT Corn (Jul. '10)

 

But there were hints of change in the corn market even ahead of the Chinese purchase. A spike in delivery cancellations and export numbers were big clues, especially the latter. The USDA reported corn export sales at 58.3 million bushels last week, far ahead of trade guesses calling for 33.5 to 43.3 million bushels in sales.

Corn finished last week technically weak. A break below $3.55 would have had the bears aiming for a near-term target at the $3.42-$3.43 level, which, if taken out, would have cleared the way to a longer-term objective around $3.28.

Shifts in trader commitments going into last week also foretold of change. Commercials added to their net short positions, intimating a greater willingness to hedge forward sales after months of lightening up their books.