Demand and Global Outlook (Sept 26, 2011)
After last week’s major drop across all three commodities, compounded by the announcement of the US Federal Reserve’s plan to buy $400 billion of long-term debt, a negative global economic outlook for 2012 appears to be inevitable. The Demand group wanted to stress these factors which pulled the market out of its last slump (June 25 to July 7, 2011): Tight stocks to use ratios, poor weather [1], increased foreign demand sparked by the cheaper prices [2] and the US dollar finding a bottom [3], which made commodities more attractive. This week we focus on demand forces from linkages between commodities to help guide your daily search and strategy.
Energy: Ethanol and the price of corn are tightly linked, given their 0.8 correlation value [4], we expect a shock to either of the markets to affect the other. In the United States there are specific mandates of an ethanol ratio in gasoline. Bearish- Mandates of oil remain, but potential loss of blenders (mixers of eand gasoline)credit in December, imply that ethanol production will decline and thus corn prices will fall. While there are other sources contradicting this predictions, doubting ethanol production with decrease.
Bullish-Crude oil prices up on Sept 26 saw a sharp rise and markets seem to be on track again.
Foreign demand: China’s demand for corn is clear, but if and when it will import remains the curious question. The demand for soybeans by Asian countries appears clearer, as China purchased both US and South American soybeans, while exports of US soybeans to South East Asia is also predicted to rise for 2011-2012 [5][6], thus soybeans should rally.
Livestock: As Part of China’s 12th 5 Year Plan, it announced its focus 1 the animal husbandry sector, revealing its desire to be more self sustainable in this industry. This will increase its demand for animal feed, pushing up the prices of corn and potentially wheat as well [6]
Despite this gloomy outlook, the fundamentals predict recovery, as prices will increase with support from strong demand for livestock feed which means bullish support for corn and wheat.[7] With the market bouncing back, traders will be buying back contracts they had just recently sold. [8]
Sources [1] http://www.agrimoney.com/feature/just-how-supportive-is-wheat-futures-best-friend--114.html [2] http://future.aae.wisc.edu/blog/articles/2011/07/06/corn-wheat-rebound-from-last-weeks-losses [3] http://future.aae.wisc.edu/blog/articles/2011/07/06/corn-wheat-rebound-from-last-weeks-losses [4] http://cmegroup.barchart.com/ethanol/archive/1316438155CME-Weekly-Ethanol-19-Sep-2011.pdf [5] http://www.agrimoney.com/marketreport/morning-markets-crops-continue-sell-off-despite-euro-hopes--1282.html?utm_source=twitterfeed&utm_medium=twitter [6]http://www.asianagribiz.com/display.aspx?PageID=0&MemberID=0&screenheight=800&screenwidth=1280 [7] http://www.agrimoney.com/news/grain-prices-revive-as-banks-warn-against-selling--3641.html [8] http://www.cattlenetwork.com/cattle-news/latest/US-grain-and-soy-review-Markets-rebound-from-losses-130584653.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+WorldcropsRSS+%28WorldCrops+RSS%29&utm_content=Google+Reader
Hey Ellie Thanks for sharing your groups insights! What i dont understand is since china has a desire to be more self sustainable,which means china will import less from States,so how can this affect CBOT price?(or can i think like,since theres more supply in US becuz of less export to china,the price would be decrease??)
If China produces more corn for itself then this should lessen the demand from the US which should reduce the price of corn. But at the same time if you visit this site: http://www.agriculture.com/markets/analysis/corn/china-cn-impts-to-surge-higher_9-ar19404corn you will notice that China's self sufficiency rate has decreased from 2010 to 2011. So the effect of its livestock policy should drive up the price of corn in the meantime. Think about it, if you need to feed animals now, but it takes time to grow corn, you will need to import it. Your comment certainly holds true though as we learned in FRE501, the inter-temporal Law of One Price. These factors will come together and be reflected in the current price for corn.