CHINA’S CORN PLAN
Tim Hannagan I PFGBEST - 05 February 2010

Thursday’s weekly export sales report attracted little attention as trade continues to trade off outside markets and seasonal down-trend influences.

Wheat exports were 418 T.M.T. off 37% from the week prior, 5% under our four-week average, but over last year’s 326 and 2008 sales of 312 T.M.T. So, we continue to see improved exports but they come on the back of a one dollar break in prices and we’re selling a lot of feed quality wheat to Asia. This is not a supply-side concern, buying-trend, but a slight shift in port destination due to price. Asian countries are closer and cheaper to ship to on top of a better price. To suggest demand has improved enough to drive prices, we would need over 750 T.M.T. sold each week and we need to see demand come from European destinations and/or Egypt. Current demand base psychology is we are just filling a hole in demand to Asian countries and drought –stricken Mexico, more concerned about quantity at value versus quality.

Corn sales were 923 T.M.T. up 2% from the week prior and 15% over our four-week average. Key Asian business was 303 T.M.T. versus 273 the week prior. It is a friendly number, but not bullish enough to offset seasonal. The long-term picture on demand remains very bullish into fall and will become a driving force beginning the second quarter. The main addition to an already positive-demand scenario of foreign feed increases and improving ethanol useage is corn shipments to China beginning soon. China has been diligent in its weak roll as a member of the World Trade Organization by not just buying on the world market, but being an exporter of corn as well. The problem here is they sell only old corn who’s shelf-life has run out to surrounding Asian neighbors of theirs, who only care about quantity at value, not quality.

China’s meager exports look to disappear and imports surge through years-end on several fronts. China’s mandate to bring more protein to its populace diet has them aggressively expanding hog and chicken numbers for meat protein requiring more corn for feed. They spent billions on warehouses to build a strategic corn and bean reserve and have a mandate for 2010 to fill those reserves on top of their 2010 increase in ethanol production. All this consumption and usage must be fed by production. There is the problem. After producing three million tons more corn than usage in 2007. 2008 saw production 13 M.T. over usage, but the 2009-10 crop year ran into trouble. The current crop was last estimated at 155 M.T., almost 10 M.T. under a year ago due to a series of bad weather events. There are now private Chinese forecasts of production falling to 150, even 140 million tons with usage estimated at 159 M.T. This sets up the closest port of origin, the U.S. to fill the hole from production. U.S. prices and inventory suggests China is poised to purchase U.S. corn very aggressively. Take note of all this as it may end up being grain’s biggest news of the year come late fall.

Soybean exports last week were 381 T.M.T. down from 673 the week prior and four-week average of 770 T.M.T. The only highlight was we were over a year ago of 336 T.M.T. Beans actually shipped were 1.275 M.M.T with China taking 865 T.M.T. suggesting they don’t intend to cancel any previous U.S. purchases to turn to cheaper South American beans. Of the weekly 381 T.M.T. sold, China was in for 262 T.M.T. versus 380 the week prior.

This report should be read like this. U.S. sales are seasonally slowing as South America enters the world market as a near-term exporter, but current year-to-date exports are exceeding the record 2009 export year. This will continue with September 1, 2010, the end of the grain marketing year putting 2010 a new record year of exports. Cause of this effect, increased world demand for high protein soyoil, and soymeal for feed on expanding world feed lot populations and China’s imports of U.S. beans greater as value persists and their progression to meet their strategic bean reserve goals.

Enough long-term psychology, let’s get back to the near-term. Next Tuesday at 7:30 am Central Time, the U.S.D.A. will release its monthly crop report. There is no U.S. production numbers until the March report, but they will adjust the ending stocks of each grain and possibly change South American production numbers. The common thinking is Argentina and Brazilian bean production will rise as rains were largely adequate to date. There is an argument to the reverse. The extreme levels of rain from El Nino, up to 500 % of normal in some areas, have Argentine growers talking of a record leaf spot disease that is known to cut yields by 10% or more, while Brazil has reported 1,200 cases of Asian rust disease, more than double a year ago. It seems too early for the U.S.D.A. to address those problems, but be aware. One current poll taken of brokerage analysts look for corn’s ending-stocks to come in at 1.746 billion bushels versus 1.764 last month. The range is 1.602 to 1.815. Anything under the low estimate is bullish as last year’s ending-stocks were 1.673, but near the high end of estimates and we will push to new February lows.

Soybean average guess came in for ending-stocks at 221 million bushels versus 245 last month and a range of 170 to 245. If we come in lower, that would be the third consecutive monthly decline in inventory and on top of higher South American production, could post a seasonal low for beans, especially if we are under 200 m.b. Wheat ending-stocks are a mute point as they are at record levels so 10 m.b. either way goes unnoticed. The average guess is 970 m.b.

My long-term prognosis remains unchanged, with seasonal lows in by February 20 and a March rally. When we enter Monday, March corn support lies at 3.42 with resistance at 3.60. March beans find support at 8.90 and resistance at 9.30

March wheat support lies at 4.60, with resistance at 4.80, then 4.95.

Watch for short-covering ahead of the report.

Tim Hannagan
PFGBEST Research Team
800.563.9510
thannagan@pfgbest.com
www.pfgbest.com

About the Author:
Tim Hannagan joined PFGBEST from Alaron Trading Corp., with more than 30 years of experience as a futures and options trader for retail accounts. As a Senior Grain Analyst, Mr. Hannagan has helped not only his investor clients but also media, grain producers and corporate executives wishing to sense, identify and capture the slightest moves in the grain futures and options markets. His concise and analytical research reports appear every trading day and can be accessed at www.pfgbest.com/research.

For 10 years, prior to joining Alaron, Hannagan was Vice President and Senior Market Analyst for Harvey Commodities. During that period, he refined his trading methodology and developed a centralized focus on individual trading clients. It was here that he developed and tested the technical reversal system he created to enter and exit all trades.

Mr. Hannagan is a nationally recognized expert on grain markets and his opinions frequently appear in The Wall Street Journal, Barron’s, Futures Magazine, Investor’s Business Daily and other periodicals as well as on international newswire services and online blogs and commodity news services. He also has an impressive list of broadcast appearances.

In December2007, Tim released his 2008 grains yearly outlook, leading the industry by accurately predicting the historic high price rally in grains. In December 2008, Tim released his 2009 grains yearly outlook. This was when the U. S. and world economies were in a collapse. He accurately called the low of the grain movement and predicted the sharp rallies into the spring/summer planting and growing season.

PFGBEST is among the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries. The company is a leader in sustainable investing through diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and direct online futures trading through its BESTDirect™ platform, and numerous other platforms and applications.

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