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Grain Markets Flounder: Is There a Bigger Story?

If the corn, soybean, and wheat markets were priced at higher levels than they currently are, it may be easier to understand why prices are in a downtrend, and why managed money is as strongly short as they are. Prices are generally below the cost of production, and at a time of year where all of the uncertainty in producing Northern Hemisphere crops lies ahead. It is a challenge to understand why there is such a bearish outlook. Could it be the market is making a bold assumption that crops will be at trendline yield or higher? Is the rain-makes-grain mentality responsible for bearishness? Are planting delays of little concern? Predicting supply is not an exact science. End users typically recognize good value and, especially in front of the growing season, more aggressively secure inventory. Farmers currently are reluctant sellers. What is different this year to keep managed money in record short positions, especially in front of the uncertainty that comes with growing crops?

As of Friday, April 12, the most recent Commitment of Traders report indicated the corn net short position was record large at over 271,000 contracts. While funds have a tendency to use technical chart formations to establish positions, one has to question the wisdom of being short so many contracts at this time of year. Perhaps there is a bigger story behind trading investment money. A plethora of recent reports regarding African swine fever (ASF) spreading through Asia (China in particular) could be the underlying fundamental story behind declining prices.

Data from China can be challenged for accuracy, particularly during an extraordinary event such as hog herd liquidation. Yet, there is enough evidence pointing toward a significant drawdown in Chinese pork production. As background information, China is the largest hog-producing country in the world, and uses all of its pork internally. It is a main staple to the Chinese diet. In 2007, Chinese pork production was 42 million metric tonnes. The Chinese government focused on a commitment to increase pork production in order to keep food supplies adequate for its growing population and economy. Production peaked in 2014 at well over 55 million metric tonnes. It then leveled off until this past year, when ASF numbers began to have a meaningful impact on projected supply. Some estimates indicate the herd down 15% to 18% from the previous year, and the sow herd down 21%. Estimates are that annual pork production will decrease 15% to 30% in the year ahead.

As pork supplies in China become less available, importing pork is an option. Recent export sales data showed a surge in export sales from the U.S. to China, despite a 62% tariff on pork entering that country. This could be good for U.S. internal corn demand and prices, as our hog herd grows. Yet, growth in the U.S. herd is not likely to be an immediate event. It looks more and more likely the recent downturn in world crop prices may simply be explained by: 1) the flow of investment dollars selling grain, and 2) oilseed futures anticipating a decline in world demand.

If you have questions or comments, contact Top Farmer at 800/334-9779, ext 129.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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