The following editorial was published in Price Perceptions issue #1252A on October 25, 2003
A Shot Across the Bow !
In our October 11 issue, we discussed the fact that several commodity markets had experienced major price advances. We explained that global economic growth was turning the corner from three years of "stagflation," but it was worldwide monetary expansion that was beginning to lift all boats.
This week, during the peak of harvesting a record crop, the corn market exploded and gained 24 cents in a three day period. The wheat market also participated in the buying frenzy and gained 41 cents in the same period. What's happening? Are harvest results below expectations? Was it only fund buying?
In August, we published a special report entitled: The Grain Drain of 2004. That report illustrated the extreme tightness that grain markets would experience during 2004 as world reserves fell to 30 year lows. It explained how China had decided to cut grain reserves to a minimum after moving to a more open economy and joining the World Trade Organization. Because China is the world's largest producer and consumer of wheat and the second largest exporter of corn, any change in their import/export policies would have a dramatic effect on world grain prices.
Although US production of both wheat and corn turned out larger than estimated in August, the world balance has changed little. In fact, since that time, China's corn production estimate has fallen 4 million tonnes and Europe's wheat slipped another 2.5 million tonnes.
Unfortunately, the USDA has not changed its corn export estimate for China or its wheat import estimate for Europe since August. This has contributed to a false sense of surplus grain supply for the US. However, Europe is beginning to buy feed wheat from the US and China announced this week they were halting all export sales of feed wheat. China has also been slow to offer corn for export after the first of the year. In fact, they raised the price of corn exports $15.00 per tonne this week as domestic prices advanced $20.00 per tonne. Corn prices in South China, the primary producing area for livestock and poultry, advanced to $4.29 per bushel on Thursday.
Sudden realization that China may be forced to curb corn exports and import wheat next year shocked the futures market this week. Subscribers should view this week's abrupt turn in corn and wheat futures as only the first shot across the bow. As more becomes known about tightness in European and Chinese grain supplies, The Grain Drain of 2004 should become a reality.
TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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