Tuesday, April 1, 2014

Is China playing us for fools?

By Phil Flynn

No Fooling!

The Chinese manufacturing sector is contracting! April fool!  No in sharp contrast to the HSBC survey which showed that manufacturing fell to 48.0, the official purchasing managers’ index for manufacturing came in better than expected as it increased from 50.3 from 50.2 in February.

Of course already some are wondering if the Chinese government is “juicing” the number so they will be slow to stimulate the economy. Even so for this time of year this is the smallest increase ever in the month of March so really the number is nothing to write home about. So from a Chinese oil demand perspective the number raises concerns about overall global oil demand growth as most expected that demand would be driven by China... Perhaps it would have been better to get an even weaker number so the market would be assured that China would give the economy a big shot of stimulus. The market still counts on China for oil demand growth and if China falters that hope will be just for April Fools.

Corn farmers are pulling back on corn acres instead of beans. That along with transportation issues is giving ethanol a boost. Ethanol gained for three days in a row and had the highest quarterly increase on record as producers sought ways to get the biofuel to market.  Bloomberg reported that ethanol futures climbed 6.4%.  Ethanol companies reduced output because of a scarcity of trains in the Midwest, where about 89% of plants are located.

Denatured ethanol(CBOT:FZ.C)for April delivery rose 20.7¢to $3.459 a gallon on the Chicago Board of Trade, the highest settlement since July 11, 2006. Prices advanced 81% this quarter, the most since 2005 in data compiled by Bloomberg. It bested the top performer, coffee, of the 24 commodities on the Standard & Poor’s GSCI Index. Cold, snow and competition for rail cars have cut into train traffic, prompting distillers to reduce production. A 2007 U.S. law requires ethanol, mostly made from corn, to be blended into gasoline, so higher costs for the biofuel may boost prices at filling stations.

Ethanol is more expensive than gasoline! Gasoline for April delivery fell 2.65¢, or 0.9%, to $2.911 a gallon on the New York Mercantile Exchange. The futures cover reformulated gasoline, made to be blended with ethanol before delivery to filling stations. Ethanol’s premium to the motor fuel expanded to 54.8¢ from 31.45¢ on March 28. The additive traded at a discount to the motor fuel for the past two years, until March 21.

In cash trading, ethanol rose 7.5¢ to $4.175 a gallon in New York, 5¢ to $3.85 in Chicago, 14¢ to $4.125 on the Gulf Coast and 5.5¢ to $4.005 a gallon on the West Coast, data compiled by Bloomberg show.

This comes as farmers are reducing corn plantings. The Wall Street Journal says that corn competition from abroad, and a flattening out of federal ethanol mandates, mean U.S. farmers are starting to turn cautious. On Monday, federal forecasters said farmers are planning to plant their smallest crop in four years as they switch millions of acres mostly to soybeans. The U.S. Department of Agriculture expects 91.7 million acres of corn to be planted this spring, down nearly 6% from the record crop farmers intended to sow last spring. Actual plantings in 2013 ended up lower because of wet weather, but farmers still produced a record harvest.

Corn prices have been down around a third from last year, though they rallied Monday on expectations that the sharp cut in plantings will combat rising production. Chicago Board of Trade corn futures expiring in May settled 2% higher at $5.02 a bushel, a seven-month high.

The Journal goes on “But record-setting corn prices spurred production elsewhere. Federal data show farmers outside the U.S. will harvest 349 million acres of corn in the current crop year, up 35 million from five years ago—an expansion larger than the area of Greece.  For much of the past four decades, the U.S. has accounted for two-thirds or more of global corn exports. That fell to a record low of less than 20% last year as the 2012 drought made U.S. corn too expensive for many countries. Exports are now rebounding, but forecast to make up 36% in the current crop year, according to federal projections.

Growing global competition is emerging as rapid growth in corn demand at home ends. Starting in 2005, federal law required increasing amounts of ethanol to be blended into the U.S. gasoline supply, with ethanol production claiming more than 40% of corn consumption last year, up from less than 15% in the 2005-06 crop year. But the buildup of demand from ethanol makers has ended, and a reduction in fuel use because of more efficient cars and people driving less has federal officials looking at scaling back the requirement.

The rise in ethanol production came amid disappointing harvests and growing hunger for corn from China as that nation's economic growth fueled greater demand for meat. The result: Corn prices eclipsed $8.30 a bushel in 2012 at the height of the U.S. drought, compared with an average of $2.90 in the 2000s. One of the fastest responses to the record prices is coming from Ukraine, which is on track to become the world's third-largest corn exporter. This year, its shipments are expected to surge 45% to 18.5 million metric tons.

Fueling that growth is interest from China, which has emerged as a major buyer after avoiding corn imports for several years. The Asian nation wants suppliers beyond the U.S., with not just Ukraine but Argentina and Brazil competing to sell crops there. The U.S. recently has seen hundreds of thousands of metric tons rejected by China because they contained a genetically modified trait that is unapproved in that country. Growing competition is fueling volatility in prices for U.S. farmers. Political unrest in Ukraine, where Russia annexed Crimea, has rippled through global markets. Traders fear financing will dry up and costs to import fuel and fertilizers will rocket, bringing a sharp decline in spring planting in Ukraine.

Ethanol of course is one reason why gas prices have been rising. Of course we should see a break in April as the seasonal maintenance season ends. 

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