Extent of Flood Threat to the Chinese Corn Crop

I’m compelled to dust off the blog this evening after my longest break yet, hopefully I can still remember the login passwords.  I have not been tempted lately to make updates, and honestly, I’m not all that motivated at the moment either, but I’m doing it out of duty.  The urgent call I feel arises out of spending a few days attempting to gather information on events which my common sense tells me are quite significant to the grain markets, and yet have gone completely absent from the early-week wire reports and agricultural-market advisory notes.    These events relate to the extent of damage to the Chinese corn crop from this week’s massive floods.

 
The effort to gather information on these events has not been helped by the fact that, in the immediate aftermath of the floods, the Chinese government imposed an effective news blackout.  According to Bloomberg news, the government “instructed the operators of mobile and online news services to dismantle ‘current-affairs news’ operations on Friday…The sweeping ban gives authorities near-absolute control over online news and political discourse.”  The Financial Times directly linked the media crackdown to coverage of the floods.

Sometime around July 21, an enormous and largely unanticipated storm brought devastating quantities of rain to a very large section of northeastern China.  The rains were concentrated on one of the world’s most important regions for corn production, the agricultural provinces surrounding Beijing.  The hardest hit province was Hebei, which accounts for 9% of Chinese corn production, and Henan, which accounts for another 7%.  Reference to the map below suggests that within these two provinces, there is no reason to think of flooding as in any way localized.  The footprint of the most intense rain covers nearly the entirety of both provinces.  The precip maps also suggest that large corn-producing areas in Shandong, Liaoning and Shangxi provinces may also be suffering less severe flooding.  These two provinces respectively account for another 11% ,7%, and 4% of Chinese corn production.  Comparison of the maps leads me to estimate that approximately 20% of the Chinese crop is now threatened by these floods.  China is one of the world’s leading corn producers at around 10 billion bushels per year, leading to an estimate of 2 billion bushels of production area under threat.  What is uncertain is the fraction of the crop loss in those areas.  Note harvest should have been well under way in these areas within the next 6 weeks.

The rain over the weekend is largely off the scale of the 1-week accumulation NOAA maps, so I’ve turned to the 15-day maps.  Almost all of Hebei, and about half of Henan, Shandong, and Liaoning look to have received approximately 7 inches of rain or more.  A very big portion of countryside, centered on the corn production area along the borders of Hebei, Henan and Shangxi provinces appears to have received around 13 inches.

Note that the size of Hebei province is 20% larger than the state of Iowa.  The extent of damage will likely depend on how quickly the rains can drain off and the soils can dry.  With such a huge section of the country receiving so much rain, it seems unlikely that the areas will dry quickly.  My correspondent Crowbar informs that major river on the China High Plain, the Yellow River, is leveed and raised decreasing the effectiveness of that channel for the water to reach the sea.  NOAA is forecasting another 1-3 inches for the hardest-hit areas over the next week, and another 2 inches for the week following.

CPCGR

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LKCW Nightly: 06-09-16

Admit it, my long break has left you sad and unfulfilled.  But take courage, there is much more of my idiosyncratic perspectives on the grains to come.

My most recent, or should I say least distant, post expressed dubiousness on the soybean run up from it’s year-long depressed trading range.  My shriveled trading account is evidence that at that time, and since, I have not shown near enough respect for the power of this rally.  Only the most cautious of bearish soymeal traders have made it through the spring without leaving spouses widows and children survivors, as  numerous rumors circulated of commercial traders getting crushed on the front-end meal contracts.  It is impressive how quickly trade analysts are willing to whittle 100 million bushels at a time off US carryout.  Late-season Brazilian drought, whfft, 40 million bushes of increased US demand.  Harvest flooding in Argentina, whfft, 40 million more.  Record import demand from China, 40 more again.  Reduced US acreage, 60 off the supply side.  Prospects for La Nina summer-weather and a midwest heat dome, another 80 hit to the supply side.  With this arsenal of contingencies and a price chart lacking defined resistance, hedge funds and speculators have scared the hell out of sellers while piling on 10s of thousands of new longs each week.  So yes, when a new crop carryout goes from 400 million bushels to 300, it raises the prospect for going to 200, which raises the prospect for 100, and then we’re out of soybeans!

But it ain’t gonna happen soon.  Farmers in the South will be harvesting soybeans in a few short weeks.  My drive-by inspection of some fields in Mississippi showed good starts with lots of moisture.  Then we’ll have the midwest bringing in the crop just as the Brazilians will be determining their acreages and beginning their sowings.  At the moment prices for beans  in Brazil are record high, and that will provide record incentive to plant.  In February, the world’s hog population will begin to enjoy whatever bounty results from that crop.   Another factor which has led to the bean rally and in which I hold little confidence, is the energetic strength in the Brazilian real.  I wonder how long currency traders will maintain their infatuation with the treacherous new leader Lula, who Zerohedge has called a Brazilian Frank Underwood,
http://www.zerohedge.com/news/2016-05-12/following-rousseffs-coup-brazils-problems-are-only-just-starting
I just wonder how long political and economic chaos in Brazil can continue to whet hedge-fund appetite for the currency there.  Recent spread behavior in beans give a clue to the tickey-tac nature of the rally and its fragility.  Last week, calendar spreads in beans went from 75 cents to 25 in 36 hours.  With that kind of downward volatility in the spreads, you can imagine what the flat-price is capable of.

Like the beans, it is South America driving the corn market.  In an incredible and mostly pretty terrible development, the world’s powerhouse feed-grain exporter and meat producer has evidently exported themselves right out of corn.  In an event animal-loving vegetarians and meat-lovers will agree is very sad, poultry have been left to starve because of the unavailability of corn “at any price,”  according to Reuters.  The safrinha crop ran short leaving livestock operations in a bad situation.  This has been, and probably will continue to be, bullish for US corn exports.  In fact, this morning the USDA reported sales of old crop US corn to China, a rare development recently.

Today I read that Brazilian feeders have resorted to feeding wheat, even high-quality wheat, which could be just what the US wheat market needs.  Whatever wheat demand out of the Middle East that has survived Dick Cheney’s experiment seems amply supplied by every corner of Western and Eastern Europe, while Asian buyers can look to Australia.  This has left US exporters with tough competition right as a record crop is about to be harvested in the US Plains, and storage is still burdened with last year’s crop. (I had a dream last night that an augur was pouring a steady flow of beautiful golden wheat above me, and I couldn’t scramble quickly enough to keep my head above the grain to keep from suffocating).  Brazil has at times in the past been a good customer for US hard red winter wheat, and with the scarcity of feed grain there, and the surge in the currency, maybe some of the US hard red can find a Brazilian home, easing the supply glut here.

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Brief History of Spring 16 Soybean Rally

Over the past month, soybeans have given the best rally seen in the ag complex (besides perhaps sugar) since the mayhem last July.  Part of it was related to a recovery in the Brazilian real, which helped the competitiveness of US beans on the export market.  (By the way, the rally in the real was catalyzed by political instability, a sure indication that the unrest is bourgeois.)  But the story is deeper than that, here’s what happened:

 

Last summer signs of El Nino were global: choking smoke from rain-forest fires engulfing the financial center in Singapore, crop-damaging rain in North America, a very wet South American winter, and consecutive barren monsoon seasons in India. Months later the El Nino registered on palm oil production, which on a global scale is comparable to vegetable oil production. I don’t know why it took so long, those tropical plants are strange: coffee, palm, agave, they all have peculiar 2-year cycles it seems unlike our friends the row crops which go seed to stubble in a few short months every year.

Eventually, the hedge funds got record-long bean oil. At about that same time, it appeared US farmers were stubbornly determined to plant corn in of spite below-cost prices, and it gave the funds a green light to complement their bean oil positions with long soybean positions. In a clever gambit, they simultaneously worked in a record-short bean meal position. That left the funds in a great position to lift the meal shorts when it looked like the buying in bean oil, and its support to crush margins and soybean prices, could not be sustained. Meal prices exploded in a few short days, giving great crush opportunities for US plants and a quick shot of adrenaline to soybean prices.

So that leaves us with hedge funds holding 150k long contracts of soybeans, not to mention the bean oil contracts. This is at a time of record world stocks (sure record global demand too), but there is an estimable possibility that the upcoming US crop could tip the global supply-demand balance bearishly. Maybe we’ll go full cycle to El Nina, get a poor US crop, and the fund longs will hold up. But it looks like a big bet.

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Ergot and Ambrosia

My posts have been sparse, as I’ve been intensely occupied making sure my bead on the market is true.  Finally though, the numerous inquiries from places like Dalian, Rosario, Odessa and Kuala Lumpur became too urgent in their need to know my thoughts, and I’m forced to commit them to writing.

You may be wondering now if Ergot and Ambrosia is a lame pretentious attempt at humor in Latin, or perhaps a poem I have been working on recently.  But ergot and ambrosia are fungi found in grain, and they have been in the news recently.  (The sizable percentage of LKCW readers who show degenerate tendencies will be titillated to know that, according to Agrimoney, ergot is psychotropic).  A couple weeks ago, Egyptian importers sealed a deal on wheat cargos, and refused to unload shipments out of a new standard for ergot.  Prices on the Matif exchange sunk toward support levels on the news, and the Egyptians invited more offers at the lower price, but got none, and a European grain conglomerate prepared to sue the Egyptian importers.  A third tender turned up offers at a premium.  Then this week, the Egyptians rejected a Canadian cargo of wheat out of the ergot rule, and also rejected US soybeans for ambrosia contamination.  There have been conflicting statements from different Egyptian agencies, and some speculation that the importers lack financing to take the grain.

These headlines have been more than enough to keep wheat prices depressed, especially considering last week’s WASDE which put US carryout at 50% of use for this year.  Spreads and FX values have kept Chicago wheat way out of line with Matif, or  with the hard red contracts for that matter, and US shipments continue to be dwarfed by those out of the EU, Russian, and Ukraine.  I read an interesting quote on Reuters from an observer today, ‘ “The market is a bit stuck. There’s no room for prices to rally as this would leave us too expensive against Black Sea origins,” one French trader said.  “At the same time if prices fall too much we don’t really have the logistical capacity to cope with the demand that might bring.” ‘  That almost sounds bullish to me.   In fact I am bullish KC wheat, at least against Chicago.  Speculators are record short in that contract, and my guys in the Central Plains (I’m sure they love it when I call them that) tell me it’s a hot and dry winter.  That might leave the winter crop vulnerable to either warm dry weather, or cold snaps, into the spring.

Soybean and corn markets have been quiet for weeks, in the midst of wild macro-market conditions, including powerful rallies in gold, volatile trade in the Japanese yen, and parabolic moves in US notes.  Financial tension and instability is accompanying international tensions, with the horrors of Syrian war worse than ever, and ongoing territorial disputes in the South China Sea.  I was taught that free markets among nations promoted stability and ultimately peace.  With Russia at war with its major wheat customer Turkey, and a common interest for higher crude prices amongst the warring parties of Saudi Arabia, and Iran and Russia, it sure would be nice if the world’s governments could pause the war long enough to make some money at least.

Corn prices have bumped nicely off support at $3.60 to open this week, with strong front-end calendar spreads.    I’ve thought for weeks that there were too many shorts in the corn market, some of them likely spread off wheat and soybeans.  Dalian corn futures in China have been rallying for a few weeks, just as the government there begins its attempts to clear poor-quality corn to market from its huge old crop reserve.  The reserves may not be of sufficient quality to stem import demand, and the situation is a wildcard for the price in my opinion.

The South American soybean crop is finishing up, and now we’re left to see if Chinese demand can continue to surprise, and if so, how much of the business will come to the US.  Dry weather has likely been great for planting safrinha crop corn, but it also increases the stakes for rainfall further down the line.  Some of the maps two weeks out are in conflict, but mostly they continue to be dry.

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LKCW Nightly: 1-22

In the last installment of this wander through the darkness, I said I’d try to keep my eye on today’s closing trends for any clues, and that I’d be paying attention to the weekly USDA export books.  Breakfast’s most bullish moment was the soymeal report of nearly 300 tons of meal committed overseas, a much larger number than the recent normal.  At that moment, it looked like the whole soy complex could have a big day building on late-week strength through Thursday night and Friday morning.   Vegetable oil was being carried away by the stiff crude correction, with meal and beans holding their own towards the top of the near-term range.  At the end of the day though it was only corn bulls who could claim small victories on the day and the week.

I won’t try to explain why meal puked an outside reversal down on the day and a doji top on the week with the excellent export numbers.  But there may be reasons for the recent strength, from supply and demand sides.

On the demand side, Chinese import of feed goods has been very strong recently in spite of the headlines on commodities and Chinese growth.  (Aside:  the persistence of above-projection demand might turn on the world’s dominant livestock market:  hogs in China.  Dim Sums today had a tough time getting a read on the situation)
http://dimsums.blogspot.com/2016/01/hogs-rebounding-in-china-pick-your.html

On the supply side, the news pace has been brisk recently out of Argentina, which leads the world in meal exports.  Argentina has suffered right along with everyone else through the current depressed conditions in commodities.  Maybe making matters worse there, the country has been shunned from international bond markets since reneging on loans during a crisis at the turn of the millennium.  A couple months ago the leftists were kicked out of office.  The new open-markets guy, Macri, slashed taxes on corn and wheat exports and backed off supporting the currency.  The policies unleashed a sudden and massive inventory of corn and wheat on to the world export markets in December.  But domestic holders of soybeans remained tighter.  The USDA even reported small imports of soybeans from the US this week.  The lack of a bean gush from Argentinian storage may have nudged meal demand back to the US some.  Macri was hobnobbing in Davos today trying to woo the world’s bond dons.
http://www.reuters.com/article/us-argentina-president-idUSKCN0V00UP

A few months back, US billionaire trader Paul Singer—one of the country’s leading supporters of Republican PACS—successively sued the Argentinian government in US courts over a debt he bought for about a penny on the dollar.
http://www.bloomberg.com/news/articles/2015-05-12/singer-s-latest-argentina-payday-bid-58-000-frozen-in-belgium
If I were an Argentinian farmer, I would tell him he could have about as many of my soybeans as he can shove up his arse.

From a bigger picture, the ags continue to rattle around in a range from this summer.  Funds have covered a fair chunk of their shorts this week, but they remain stoutly short.  Painfully for the bulls it sometimes seems the crude oil cuts grains from both sides.  When crude fails it brings biofuels with it, and when it rallies it brings along the stock market and the dollar index.  In this environment I’m giving corn the best chance for price strength.  It had the best technical performance for the week, and the South American production cycle might tip more risk premium in corn’s direction.

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LKCW Nightly 1-21

My reports are back, if you are overwhelmed with the need to thank someone, thank 4-Row Cattle.

For a relatively slow day of news on a shortened MLK-holiday week, Thursday grain trade looked serious, as though it is setting up for markets to choose a direction by Friday close.  Bears were put in check with the Jan 12 monthly WASDE and semiannual stocks report.  On that day, there was evidence the corn market had simply run out of sellers.  The January report typically generates limit moves one way or the next, but it was yawner this year, we had 14-cent range for corn.  Most notably, sellers couldn’t find a single stop below $3.48 support with hedge funds more heavily short than ever before, according to the CFTC.

From that point, corn’s been leading the mini-rally with a weekly-chart gap 4-cents below tonight’s close.  What was strange today was that wheat and soybeans showed mid-session strength while corn pulled back.

Soybeans were able to test levels from the strong weekly open, and traded through the 100-day moving average.  For an hour at least.  The bean bullspreads which have been running for the last couple weeks edged back for the second consecutive session.

Wheat was able to show a little green, even with a very firm dollar and the rouble making record lows.   The GASC tender today was exceptional in that cash US export markets abandoned their perfunctory plunges into the tender in symbolic effort to make an offer.  Not even a single bushel of US wheat offered this time.  So while there may be some wheat bulls in Chicago thinking new crop acreage reductions, there seem to be none in Paris or Black Sea ports.  US bulls could take charge of the market ultimately, but they’ll have to bring the spreads with competitors in some first it would seem.  Unless that is the US is willing to write off the entire marketing year, given the super firm US dollar and ultra depressed rouble.

So today the corn market got some backup from wheat, soybeans and even the oil market.   By now it seems the oil market gets more air coverage than Donald Trump, so everyone knows that crude traded to $25 this week if you round by fives.  Today however it was able to claw higher into the weekly range with a bounce.  On such a day I would have thought corn could at least head-fake toward its 100-day, after all that’s where the soybeans found a few stops today.  Instead corn settled back a little with a test of the 50-day.

I’m leaning toward taking Friday’s close as guidance for the inter-commodity spreads and general direction of the complex next week.  We’ll start the day with export sales announced at at 7:30 a.m.  Wheat’s been pullin’ in bids for 300k or so metric tons recently, and soybeans 1.5 million.  I’ll be looking closely for any surprise global demand for wheat or soybeans.

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LKCW Nightly: 10-21

Wednesday trade in corn started promptly with the evening swing shift. On Globex’s normally quiet 7pm open, 37k contracts of December ’15 corn traded within 60 minutes. That volume concentration is usually reserved for the monthly WASDE releases, in the afternoon. Those trades were as quiet as they were large, with no traces of them on the intra-day bars provided by the CME or my trading platform. Calendar spreading seemed to be involved with a spike in nearby spreads and almost no flat price response. Pretty sneaky miss, as they used to say. Ultimately, flat price did follow the bull spreads, and corn made a measured but very firm close above the 50-day moving average.

Soybeans too followed through on Tuesday buying with “rumors” of Chinese purchases: Guys, they are not rumors, government reports are showing the imports on daily and weekly releases. Today it looks highly likely that the rally 8 days ago was only the first shoe to drop.

Wheat built on Tuesday’s reversal, closing strongly into virgin green territory on the week (the same can be said of corn and soybeans actually). Unquestionably, El Nino this fall has hurt global wheat production, perhaps most notably in Australia and India. Establishment conditions in Russia are adverse. I haven’t looked at specific line items in USDA’s global production projections, but I get the feeling that those numbers may finally actually decrease in upcoming reports, a development I’m not sure we’ve seen in a while. Sellers had their way early in the week with the imminent rain looking to spillover from the Panhandle areas, and prices have reversed decisively off $4.83.

Increasingly it appears that $4.80 in wheat, $9.00 in beans, and $3.75 in corn are going to be tough nuts for bears to gnaw through in the near future.

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