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3 reasons why corn avoids $3

10/17/2013 @ 7:46am

With the U.S. corn market trading in the mid- to low-$4.00-per-bushel range, and projections of an all-time record crop coming out of the fields, the obvious question is whether the market drops into the $3.00 range.

It might, but not for long, says Terry Roggensack, co-owner of The Hightower Report. And he gives not just one, but three, reasons why the corn market will not trade consistently at the $3.00-per-bushel level.

"I think this $3.00 corn talk is crazy," Roggensack says. "And, I know that not many people are of that opinion. But we think China will buy a lot of U.S. corn."

Generally, the $3.00-per-bushel corn talk revolves around the U.S. ending stocks reaching a 2.0 billion-bushel mark, in this marketing year. Therefore, if the U.S. continues to see demand setback, knowing exports reached their lowest levels this year since 1973, large corn ending stocks will be problematic for corn prices.

However, Roggensack says that it is important to remember that it is not normal for the corn market to go way under the cost of production, especially when global supplies are not sufficient.

"For instance, the last time corn traded in the $3.00-per-bushel range, and even in the $2.75 level, the cost of production was "way down there."

CHINA'S APPETITE

To further his point, the Chicago-based research analyst looks toward China's cotton buying habits as a big reason why the corn market has limited downside.

In the last three years, China's government has been buying cotton from their producers. They import cotton for daily domestic use while storing the cotton produced in-country, he says.

After three years of this process, China has built up 591 days of supply (61% of the world's cotton), in its Strategic Reserve Fund.

Ultimately, the program supports their local farmers while the government accumulates supply.

"This is a fact. I'm not making this up," Roggensack says.

So, what happens if the Asian giant does this same hoarding with its corn supply?

It's well known that China is a net corn importer, producing 215 million tons while using 220 or more million tons annually.

A 591-day supply of corn for China would equal 362.8 million tons. With 53.0 million tons on hand now, China would need an additional 308.00 million tons of corn, to reach a 591-day supply of corn, he says.

"That's 12.12 billion bushels of corn," Roggensack says. And right now, USDA's latest estimate shows China importing 7.0 million tons of U.S. corn. And that number was set when corn was trading at $6.00. So, with corn now in the $4.00 range, I wouldn't be surprised if China buys 40.0 million tons."

Roggensack adds, "I'm not saying China will import 308 million tons of corn. But they did with cotton."

The current price of corn favors China importing U.S. corn. "Today, China can buy U.S. corn at a 25% discount compared to its domestic market. This is why I don't see U.S. corn going to $3.00, because China can buy a lot of corn," Roggensack says.

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