Saturday, October 1, 2011

Jilin Corn Tour: Lust, Caution

Corn tour participants interview a farmer (source: Futures Daily

The Dalian Commodity Exchange sponsored a series of crop tours in northeastern China this month. There are dozens of reports posted online. The report on the corn tour of Jilin Province (pt. 1, pt. 2) predicts that Jilin will have another good corn harvest, but warns corn market participants to exercise caution over the coming months.

The corn tour made a big circle around Jilin Province to assess this year's corn harvest and learn about market conditions. The tour found widely varying crop conditions. Photos of sample corn cobs from various regions illustrate the wide range of conditions. In some places there was moderate to severe damage from storms, drought, and pests, but they report that damage to the corn crop was either confined to small areas or offset by improved weather later in the growing season. The tour's assessment is that the Jilin corn crop will be good this year.

More telling is the tour's report on market conditions and farmers' intentions to sell corn. Corn prices are on a steady upward trajectory that farmers expect to continue. One of the factors supporting higher prices is the rising cost of production. Farmers told corn tour participants that production costs rose 15-to-20 percent this year. Another factor is the government's policy of guaranteeing that grain prices will rise steadily. This builds in expectations that there is no chance that prices will decline; so the best strategy is to hold your corn as long as you can.

The conventional wisdom around the world is that China's corn market is a one-way bet, that more demand and limited supply will drive prices ever-skyward. Consequently, investors world-wide have lusted after any investment that can expose them to the sure bet of China's corn market.

Jilin farmers are on the bandwagon. Unlike past years when prices tended to fall after harvest, they expect a higher purchase price for corn of 1950-to-2100 yuan/mt (about $7.70 to $8.30 per bushel) and further increases in the future. Most Jilin farmers say they intend to delay selling their corn. More than half of farmers interviewed on the tour say they will sell only half of their corn before spring festival (February), holding the rest to sell between February and May. A few farmers plan to hold most of their corn to sell after the spring festival. Farmers generally have more cash available these days and don't need to sell their grain in a hurry (a result of cash from off-farm work and improved credit availability).

Jilin corn purchasers told the tour that they expect to pay more for corn this year too, but purchasers see some potential downside risk on the horizon. The Chinese corn supply looks like it will be abundant this year, and demand may weaken in coming months. The build-up of the swine herd will likely come to a halt by spring festival. The Chinese government is trying to control credit, dampen inflation, and rein in industrial use of corn. There are signs of a weakening Chinese economy. Today's Wall Street Journal announces that investors are starting to dump Chinese stocks, the Chinese yuan has bumped against the daily trading limit which suggests flight of money out of China. We saw in late 2008 that demand for commodities in China can collapse in a heartbeat when the economy tanks--are we facing a similar situation now?

The lust for Chinese corn can be a dangerous game. Farmers' intentions to hold their corn off the market until next year combined with a scenario of a demand slow-down could add up to a collapse of Chinese corn prices during 2012. Hence, the Dalian corn tour report's assessment is that this year's corn market trend will be especially "complex" and advises caution.

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