Drought hit China expects bumper grain harvest

by Commodity Online

World’s largest grain consumer China said it expects a record grain harvest this year despite a drought that has hit its wheat-growing regions.

According to Chinese agriculture minister Han Changfu the country aimed to get the eighth successive record harvest.

It would come amid international concerns that the drought could hit China's harvest, causing it to import more, pushing global prices higher at a time when prices already are on the rise, he added.

Han said current wheat harvest benefited from recent rain and from massive drought-relief efforts. China's 2010 grain harvest totaled 546 million tons.

Han said the government will regulate grain prices but not keep it too low which would hurt farmers. China's main imports include corn and soybeans.

Concerns have been raised about the country's wheat supply this year due to a prolonged drought that affected production and a sharp drawdown of national and provincial reserves through a program of auctions designed to contain inflation.

A combination of increasing prices in the international market, high domestic inflation expectations, rising production costs and strong demand has pushed grain prices higher, but further increases will be restrained, Han said on the sidelines of the annual legislative meetings of the National People's Congress.

China consumed about 40 million tons of corn for production of starch and alcohol last year, accounting for about 25% of total output, industry analysts estimated.

China's grain output rose 2.9% to 546.4 million tons last year, marking the seventh consecutive year of growth.

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Goldman warns of 'downside risk' to crop prices

by Agrimoney.com

Agricultural commodity prices face "downside risk" – for now - Goldman Sachs analysts warned, while Rabobank said record corn values could still be on the agenda, as analysts reacted to an end to ever-tighter forecasts for crop supplies.

Goldman Sachs urged investors to sell out – at a profit - of the cotton contract it recommended for purchase four months ago, having let a buy rating on Chicago corn for March lapse with the contract.

The shift reflected the "inventory stabilisation" evident in the US Department of Agriculture's influential monthly Wasde report into world crop dynamics, which ended a long run of declining forecasts for world  agricultural commodity stocks.

The USDA's unchanged estimate for US corn inventories at the close of 2011-12 followed nine successive months of downgrades.

 "We believe that this stabilisation will put a lid on crop prices in the near-term," Goldman analyst Damien Courvalin said.

"We actually see downside risk to crop prices in the near term," he added, singling out corn and cotton, for which a March plantings intentions report due at the end of the month is expected to show particular gains in US farmers' sowing plans.

'Supplies are not short'

The report also provoked a downbeat response from other observers, including AWB, the Australian grain handler, which said the data "provided further negative direction to markets", while Commerzbank said they showed that the "upside potential for wheat is largely exhausted".

At Commonwealth Bank of Australia, Luke Mathews said that a "sizeable" 4m-tonne upgrade to world wheat inventories had left the global stock-to-use ratio at 27.4%, showing that "old-crop wheat supplies are not short".

However, analysts stopped short of writing obituaries for the agricultural commodities rally, with Goldman Sachs warning that, overall, "average weather conditions in 2011 will not be sufficient to significantly rebuild critically low inventories, and will keep crop prices elevated".

"Any weather disappointment in either the planting or growing months in the northern hemisphere would likely push crop prices above their current highs," the bank said, maintaining a recommendation for investors to hang on to November soybean exposure.

"Strong competition from both the corn and cotton crops in the US will limit the expansion of soybean acreage."

$8 a bushel corn?

Commerzbank was upbeat over corn prices, saying that Thursday's fall of more 2% was an "exaggerated" reaction to the Wasde estimates.

"At 17m tonnes, [US] corn inventories remain at a 15-year low," the bank said.

And Rabobank analysts pointed out the incentive for ethanol producers provided by high oil prices at a time of declining corn costs.

"The economics of blending ethanol have increased significantly, as ethanol prices have risen more than 5% year to date gasoline has increased more than 20%," the bank said.

"This gives a further incentive for ethanol production to persist above USDA's forecast.

"As gasoline prices approach $3 a gallon, we estimate corn must trade at $8 a bushel in order to reduce corn demand for ethanol."

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Wheat prices fall after US lifts hopes for stocks

by Agrimoney.com

Grain prices fell on both sides of the Atlantic after US officials unexpectedly raised their estimates for world stocks of major agricultural commodities.

Investors had expected the US Department of Agriculture, in its much-watched Wasde report, to upgrade its forecast for global soybean inventories at the end of 2010-11, thanks to better prospects for Brazil's crop, the world's second biggest.

And, indeed, the USDA lifted its estimate for the Brazilian soybean harvest by 1.5m tonnes to a record 70.0m tonnes, reflecting "higher projected yields".

The revision, after some adjustments for last crop year too, fed through to a 120,000-tonne lift in the estimate for global soybean stocks, slightly less than the market had prepared for.

Prices tumble

However, USDA increases to forecasts for world corn and, in particular, wheat inventories came contrary to expectations.

Thursday's closing prices Chicago wheat, May contract: $7.40 ½ a bushel, (-2.4%) Chicago corn, May contract: $6.82 ¾ a bushel, (-2.6%) Kansas wheat, May contract: $8.37 a bushel, (-1.9%) Paris wheat, May contract: E226.25 a tonne, (-2.5%) London wheat, May contract: £187.50 a tonne, (-2.2%)

"The global wheat numbers will be considered bearish by the wheat market," Macquarie Securities said, adding that the data were likely to "induce even further speculative selling pressure in the short-term" for a grain already down 12% since mid-February.

And investors' reaction was to send grain prices lower.

Paris wheat for May at one stage fell more than 5% to a three-month low of E220.00 a tonne, with Chicago wheat too recording its lowest prices since early December.

Chicago corn for May closed down 2.6%.

'Demand trimmed'

The forecast of higher wheat stocks reflected in part higher forecasts for crops in Argentina and Australia, the main southern hemisphere producers, which enjoyed bumper harvests.

Key Wasde estimates, change on Feb and (on market expectations) US wheat exports: 1.28bn bushels, -250m bushels, (n/a) US wheat year-end stocks: 843m bushels, +25m bushels, (+33m bushels) Global wheat year-end stocks: 181.9m tonnes, +4.13m tonnes, (+4.33m tonnes) Global corn year-end stocks: 123.1m tonnes, +630,000 tonnes, (+1.51m tonnes)

Australia's crop was estimated at a seven-year high 26.0m tonnes, thanks to better-than-expected yields in Western Australia, usually the country's top cereals growing state, "where wheat quality was not hurt by harvest rains as in the east", albeit being hit on quantity by drought.

However, the USDA also noted signs of rationing by users in response to prices which last month hit two-year highs in Chicago and Paris, and record highs in London.

The report flagged "reduced import prospects for a number of smaller markets as high prices trim demand". The estimate for Russian consumption was downgraded by 1.5m tonnes, thanks to a "reduction in expected wheat feeding".

Forecasts for wheat exports by both the US and European Union, the two biggest shippers, were downgraded.

Safrinha question

For corn, the USDA stuck by forecasts for domestic supply and demand.

However, it raised its forecast for world corn stocks, reflecting "high reported area and yields" for Brazil's summer crop, and prospects for the winter crop currently being sown.

The Wasde, raising by 2.0m tonnes to 53.0m tonnes the estimate for Brazil's corn production, highlighted "expectations for increased area for the winter crop, with government planting dates extended for crop insurance and loan programmes".

However, the observation is at odds with that of many private analysts who have warned of a knock-on effect on sowings of winter, or safrinha, corn from rain delays to the soybean harvest, which has kept land tied up.

Indeed, the Brazilian concessions on planting windows were implemented because of the extent of the delays.

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Cotton prices to 'stay high for the next season'

by Agrimoney.com

Cotton prices are to "remain high for next season", despite better prospects for production in Australia, where dismal winter weather has left growers a silver lining, US farm officials said.

The US Department of Agriculture upgraded by 500,000 bales to a record 4.5m bales its forecast for Australia's 2010-11 cotton crop despite the "excessive" rainfall and flooding that the country, the fourth-ranked exporter of the fibre, suffered from late November to early January.

"Although the floods had a devastating impacts in certain areas, field observations by [official US] crop-assessment specialists… indicate that most cotton growing areas actually experienced limited flood damage," the USDA said.

"The majority of cropping areas are not benefiting from the improved soil moisture profiles and abundant irrigation reserves" left by the weather which, in Cyclone Yasi, included what was billed as the most severe ever storm to hit Queensland, one of Australia's two main cotton growing states.

"Prospects are high for both yields and total harvested areas, and by all estimates the Australian cotton industry is on track for a record cotton harvest."

'Little buffer' 

Nonetheless, the USDA said that cotton prices "are likely to remain high for next season", given weaker prospects for demand in India and soaring demand in China, the top consumer and importer, and producer, of the fibre.

Wasde 2010-11 cotton changes. March estimate, (change on Feb) Australian production: 4.0m bales, (+500,000 bales) Brazilian production: 8.8m bales, (+600,000 bales) Indian production: 25.0m bales, (-1.0m bales) Chinese production: 29.5m bales, (-0.5m bales) World year-end inventories: 42.33m bales, (-480,000 bales)

"China's ending stocks have continued to tighten, indicating strong import demand going forward," the USDA said.

"With stocks already low, and the state reserves depleted, the gap between China's production and consumption will have to be filled by more imports."

Yet thin supplies left the world with "little buffer in case of either problems with production or increases in demand in major end use markets".

India downgrade

The USDA attributed its downgrade to India's production estimate to "drier-than-normal weather toward the end of the season", notably in Gujarat.

"Recent market arrivals indicate a smaller crop than previously projected," the department said, cutting its forecast for Indian output by 1.0m bales to 25.0m bales .

"The poor late-season weather has resulted in declining yield prospects."

The potential for continued export restrictions by India, which has clamped down on shipments in an effort to keep a lid on domestic prices, "raises concerns about the international availability of their stocks, which adds greater uncertainty to an already unsettled market," the USDA added. 

In New York, May cotton recovered early losses to stand at 205.58 cents a pound at 16:15 GMT, up 0.6% up on the day.

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Energy Sector Crushed

by Bespoke Investment Group

The S&P 500 Energy sector had been propping up the S&P 500 as a whole this year, but today the sector finally made its impact felt on the negative side with a huge decline of more than 3.5%.  As shown in the chart of the sector below, the tight uptrend channel that had been in place since last December was broken today, and broken significantly.  

As Crossing Wall Street pointed out earlier today, it was so bad for the sector that Exxon Mobil (XOM), the sector's largest stock, lost more in market cap than most other company's are worth!

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Which Way is Gold Going to Go?

by Bespoke Investment Group

After once again trading to a new all-time high last week, the price of gold has seen a notable pullback over the last few days and is now trading back below its highs from last year.  When the metal pulled back at the start of the year, a lot of chart watchers were calling it a triple-top.

The pullback was short-lived, however, and by last week it looked like gold bulls were going to have the last laugh when new highs were once again made.  No sooner than they could pop the champagne, though, gold has broken right through that former resistance line.  While the comparison isn't perfect, gold's pattern is beginning to look a lot like an arcane chart pattern referred to as three peaks and a domed house (see chart below).

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