“Spending two weeks in China and traversing nearly 2,200 miles of the eastern seaboard from north to south hardly grants me expert status on their economy, but a number of observations from my time there offer insight. Number one on my list is that the Chinese know what is going on inside their borders and they are not as encumbered as the US in making adjustments to guide their economy. Number two is that controlling inflation appears to remain a priority over stimulating their economy. The PBOC is less concerned about a slowdown in their economy than they are about food and energy inflation. If China’s real estate crisis was poised to bring down their economic miracle, we wouldn’t have expected the PBOC to tighten throughout 2011 and keep it on hold into early 2012. In my travels I noticed large numbers of building cranes operating in Shanghai, Beijing, Nanjing, Hangzhou, Ningbo and Haikou.
“During my trip I made a 950-mile, high speed train trip from Beijing to Shanghai in 4 hours and 20 minutes, leaving exactly on time and arriving exactly on time. I also took a 7 minute and 20 second trip of 18.6 miles (260 Mph) from downtown Shanghai to the Pudong International Airport on the Maglev train for roughly $6.00. A similar trip on the Chicago “el” takes 45 minutes! In the Southern China province of Hainan I flew over the world’s largest self-contained gold complex, which upon completion is expected to hold 22 golf courses. This is in a country which banned golf as recently as the mid 1980’s.
“Another observation is that China is dedicated to dramatically expanding its domestic feed industry. At the Southern China Feed Conference, there were 699 companies in attendance. The second day of the conference was exclusively focused on aquaculture, and as we report in the special Aquaculture section of this issue, China’s soybean meal demand for aquaculture already equates to 235 million bushels of soybeans, about 94% of US ending stocks for 2011/12. It is our prediction that Chinese feed demand for aquaculture will be about 15% of their feed demand for pork and about 13% of the feed they use for poultry. This would put their aquatic feed demand at roughly 1.115 million metric tons in 2012.
“At the feed conference several crushers were surprised at my bullish price forecast for soybeans, for they were bearish toward crush margins. But at the same time several companies suggested they were an expanding both storage and crushing facilities!
“Another sign that China is poised to dramatically expand its feed industry came from a government official who suggested that the number-one goal of his office was to build a livestock enterprise culture. Another potential growth area for feed demand will be for the production of rabbits. China is currently thought to represent as much as 40% of total world rabbit production.
“I would suggest that a serious contraction in Chinese economic activity is unlikely and that before such a threat begins to materialize, the PBOC would move to avert a sustained slowdown. The recent political turmoil in China has probably resulted in a more accommodative stance by the Chinese government.
“Seeing crude oil prices almost $10 a barrel below the March highs, pork and corn prices sharply off their highs from last year, and a number of other critical commodity inputs becoming cheaper, I still think that prospects for commodities in 2012 remain bright. Don’t count on the global economy being held back as it was last year by a series of extraneous events. The recent setback in equities and commodities in the wake of the “on-hold” view toward the US Fed and the softer than expected US Non Farm Payroll results should be viewed as an opportunity for economic sentiment and prices to move back to more realistic levels.”
The dramatic, 9.1% drop in world soybean production for the 2011/12 season leaves the soybean market's focus on the "need" for a jump in planted area and the "need" for a high yield for the 2012/13 season. The soybean market rallied sharply in the first three months of 2012 in a last-ditch effort to secure more acres, but with the strong corn market the rally was not enough to cause a significant shift in producer planting ideas for this season. The Prospective Plantings estimate in late March came in at just 73.9 million acres for soybeans, which was well below trade expectations for 75.4 million. Plantings were estimated to be down 550,000 acres from last year in Iowa and down 200,000 from last year in Indiana, Minnesota and Nebraska. The drop in South American production that was reported in the April 10 USDA supply/demand report means that demand for US soybeans will likely remain very strong, even with their relatively high price.
Brazil's soybean production for 2011/12 came in at 66 million tonnes, down from the 68.5 million-estimate in the March report and down about 1 million tonnes from trade expectations. The Brazilian government's official crop estimate, also released on April 10th, came in at just 65.6 million tonnes, and this news was seen as supportive. This, along with talk of further losses in Paraguay, opens the door for further revisions lower in South American production for future supply/demand updates. South America production is already projected to fall 17.6 million tonnes from last year.
The fast pace of shipments so far to China has more and more traders believing that China's import demand for the 2011/12 season will be closer to 58-59 million tonnes than the current USDA estimate of 55 million. China customs data reported March soybean imports at 4.83 million tonnes, a 58 million-tonne annualized pace. Last year China imported 52.3 million tonnes.
The technical action on the day of the report, with new highs for the move, a lower close, and an outside-day, may be a sign that the market has put in a near-term top. Traders view the market as extremely overbought basis traditional technical indicators, and the recent Commitments of Traders report showed the fund traders holding record high net long positions in the soybeans and soybean meal. This leaves the market vulnerable to a technical correction over the short term.
Many traders are already looking for an increase in planted area of 1-2 million acres due to the recent run higher in prices. However, the fastest start on record for corn plantings could still hold back the expansion in soybean acreage. In their April update, the USDA pegged US soybean ending stocks at 250 million bushels, down 25 million from last month. World ending stocks for the 2011/12 season came in at 55.52 million tonnes, down from 57.3 million last month and down from 69.12 million last year.
The enclosed supply/demand table, with planting intentions acreage updates and various yields, illustrates the potential for extreme tightness for 2012/13. With the smaller beginning stocks, a trendline yield will not be enough to leave much carryover for the coming year. Even with a record yield the market will need to slow the demand trend. If an additional 1.5 million acres do get planted, another 65 million bushels could be added to ending stocks, but the situation will still be historically tight. The USDA will release its first official 2012/13 supply/demand update on May 10th. Traders will be waiting to see where and how demand gets reduced. Our table suggests that the soybean market will be extremely sensitive to planting and growing conditions in the coming year.
With US corn producers looking at their fastest planting start on record and the USDA already looking for new the crop to be available in August (easing the tight ending stocks situation), corn bulls could be fighting an uphill battle over the next month. The March Quarterly Grain Stocks report confirmed the extremely tight cash market situation, but that was not backed up with stronger demand numbers in the April USDA supply/demand update. On top of that, the freak weather in March has left traders talking about a favorable looking crop into mid-May. "Knee-high by mid-May" could be the new saying if the weather continues to impress. The recent Crop Progress report showed that 7% of the corn crop had been planted as of April 8th, compared to 3% as the 10-year average. Traders are looking for plantings to be 30% complete by the middle of April, & 75-80% complete by May 1.
The enclosed table ranks the last 20 years in order of the percentage of the crop planted by May 1st. It looks likely that this year's place will rank near the top. While there is no clear price trend for April 1-July 1 based on the pace of plantings, there does seem to be some tendency for weakness. In two of the top four years, December corn had a break of at least 56 cents from April to July. The market also declined in 7 of the top 9 early-planted years. The average loss in the 7 down years was 33.4 cents. In the other two years, the market saw gains of 7 1/2 cents and cent.
In the April 10th supply/demand report, the USDA seemed to have the opportunity to raise feed usage, raise China import demand, and lower ending stocks, but this did not occur. As a result, a long liquidation trend emerged as the dominant force. In the report the USDA pegged ending stocks for the 2011/12 season at 801 million bushels, unchanged from the March estimate and 70-80 million bushels above trade expectations. The USDA did mention better wheat feeding into the summer, and it also mentioned that feed usage for old crop corn will be lower because new crop corn will be available in August.
The report pegged world ending stocks at 122.7 million tonnes, down from 124.5 last month and 125.02 million tonnes last year. This would result in a world stocks/usage ratio of 14.1%, which is the lowest since 11.7% for the 1973/74 crop season. Beginning stocks were revised lower due to a 4 million-tonne adjustment lower in China. This 8% adjustment in China's beginning stocks did not seem to get much press coverage. In the end, any weather issue for the corn crops in China or the US could lead to either massive imports of US corn into China and/or a significant tightening in the new crop outlook.
Old crop corn is already trading at an 80-90 cent premium to the new crop, which should help divert demand to the new crop. Cash corn is still trading at 30-cent premium to the May contract for central Illinois, compared with an average cash basis of 10 cents under May corn at this time of the year. The strong cash market will also help ration demand. Traders are looking for ending stocks for the new crop season to reach 1.8-1.9 billion bushels. A trend yield of 160.5 bushels per acre would put ending stocks near 1.485 billion. Ending stocks and yield estimates could climb in the next few weeks due to the active planting pace. The April 3rd COT report showed non-commercial traders (mostly fund traders) were still net long 235,739 contracts. This could be setting the market up for a significant long liquidation break over the next few weeks and a volatile trade this summer. Corn producers might consider buying December corn 540 puts and/or selling Dec 620 calls.
Aquaculture is the farming of aquatic organisms such as fish, mollusks, crustaceans and aquatic plants. Growing populations around the world have put added strain on the demand for protein, and that has fueled a significant increase in aquaculture production (up 72% from 2000 to 2009 according to the FAO). Aquaculture is viewed as a more efficient way of producing proteins than traditional land-based meat production. A study conducted last year showed that 100 pounds of feed will yield 65 pounds of farmed salmon but only 20 pounds of chicken and 13 pounds of pork.
Listed below are some facts about the aquaculture industry and its potential impact on the global soybean market:
China generated 62.5% of world aquaculture production of fish, crustaceans and mollusks in 2009 (34.8 million tonnes). Other major producers include India, Vietnam, Indonesia and Thailand.
Fishmeal is more efficient as a protein source for aquaculture than plant- based proteins. (Carnivorous fish are not accustomed to plant-based feed.) Progress has been made on the plant end, but feed rations still require 15-30% fishmeal.
Expansion of global aquaculture could use 70% of the global fishmeal supply by 2015. Global fishmeal output has been running around 6-7 million metric tons per year for the last ten years. Average global trade has been running 3-4 million tons per year.
China is by far the greatest consumer of fishmeal, ranging between 1.6 and 2 million metric tons annually. Japan and Thailand follow with 700,000 and 400,000 metric tons per year, respectively.
While some decline in fishmeal output can be blamed on overfishing, most of the variations have been attributed to the presence of El Nino.
The apparent limitations to fishmeal output leaves the potential growth in the aquaculture sector dependent on alternative feed sources, such as soybean meal, and on the ability to develop plant-based feeds that are efficient for aquaculture production.
The protein content in fishmeal is estimated at 65% versus 48% for soybean meal.
World soybean meal production in 2009/2010 was 165 million tons, which was about 25 times greater than global fishmeal production.
The expansion of China's swine, poultry and aquaculture sectors has been the driving force behind China's importing of soybeans. The Iowa Soybean Association estimates that China's aquaculture sector consumes 5 million metric tons of soybean meal or the equivalent of 235 million bushels of soybeans.
Sources: Food and Agricultures Organization of the United Nations (FAO), USDA, Iowa Soybean Association.
Usually our trade suggestions are focused on the near term, but the historical slide in natural gas prices and the two-month long rebound in the Yen have created situations where we see the need to make longer-term, investment-type recommendations. There are trading opportunities that need to be acted on quickly, and then there are investment plays that offer significant long-term potential. But often the long-term investments may be in markets that are not yet ready to shift into a sustained trend. Buying far out-of-the-money, long-dated options could be one way of approaching these situations, but we think using combinations of options and futures and/or various option spread strategies can increase our staying power and reduce risk. Another benefit is that we might be able to let the market finance a portion of our trade and put us a leveraged position if our opinion proves accurate. We will kick off our new "Investments" section with trades involving the short side of the Yen and the long side of natural gas. In subsequent newsletters we will update these positions and possibly add additional strategies from time to time.
Nearby natural gas prices continue to suffer from a record US production pace, record high inventory levels for this time of the year and lack of a near term demand catalyst. However, cheap and plentiful natural gas presents an attractive alternative to $100 per barrel crude oil and $4 per gallon gasoline. While the near term fundamentals are likely to keep pressure on natural gas prices, a pullback in US production and new demand sources from the automotive and utility sectors favor a bullish bias over the intermediate term.
The natural gas market is currently transitioning from the winter inventory drawdown period into the summer stock-building phase. The extraordinarily warm winter has left US storage levels at record highs for this time of the year. This comes as the EIA is forecasting 2012 natural gas production to reach another record, boosted by a surge in shale gas output. At this rate, supplies are expected to exceed US storage capacity in late summer. Record storage and production, along with limited storage capacity, have the potential to trigger a further slide in prices as operators try to make room for new natural gas.
Meanwhile, historically low prices could slow the gains in US production. The latest EIA recently forecasted the rate of annual production growth in 2012 to slow to 4.5%, down from 7.9% in 2011. The drop in prices has already sparked a 31% reduction in the Baker Hughes rig count from the October 2011 high. This decline has been slow to materialize into a drop in production, but low natural gas prices have already forced a number of companies to halt production at higher-cost wells. There are a couple of demand catalysts that have been gaining attention recently: natural gas-fueled vehicles and natural gas-generated electricity. Besides the lower prices, the benefits of switching to natural gas in fleet transportation are that it requires less maintenance, increases engine life and provides fewer greenhouse gas emissions. The amount of coal used for US electricity generation is expected to fall 10% in 2012, while natural gas use expected to increase by more than 17%.
The warmer winter in the US has reduced the number of heating degree days for 2012 to 11% below the 30-year norm. And while that caused a 4% reduction in US natural gas use by the commercial and residential sectors, that is expected to be more than offset by the boost in consumption for electric power generation. The warmer weather trend in the US could provide an added boost to air-conditioning demand this summer. As it stands, natural gas demand attributable to air conditioning is forecasted to run about 10.5% above the 2011 peak in the third quarter.
Natural gas prices are down 85% from their 2008 peak and are expected to grind lower as the production/storage issue is resolved. The downdraft in prices has already done a good job in discounting a warm winter period and record production pace. Support for natural gas on the monthly charts stands at $1.850, then $1.760. To capitalize on the potential for a further drop in prices and then a late-summer rebound, we recommend a strategy of selling futures and buying out-of-the money calls.
After reaching a high for 2012 in early February, the June Japanese Yen lost more than 9.5% in value over the next six weeks. The main catalyst for the selloff was the Bank of Japan, which increased the size of its quantitative easing measures and set an inflation target of 1%. Japanese government officials and business leaders have been concerned about negative impact of the strong Yen on their economy. These concerns were reinforced by Sony's bleak earnings report earlier this month. A strong rally in global equity markets during the first quarter of this year added to the erosion of safe-haven support for the yen and exacerbated its decline. But over the past few weeks, the Yen has bounced sharply off of 11-month lows, as concerns with peripheral EU debt has triggered a flight to safety out of the Euro zone. Now that the Yen has bounced in the wake of this month's lukewarm US jobs data, it may be time to take another look at entering the short side of the market.
A significant portion of Japanese industry is export-related, so the historically strong Yen created plenty of difficulties for the Japanese economy in 2011. Japanese GDP has been negative during 4 of the past 5 quarters, and the one positive reading was likely due to reconstruction after last year's earthquake and tsunami. Deflation has been a chronic condition, with the latest reading of their year-on-year Consumer Price Index reaching a 3-year high of only 0.3%! There are indications that the Bank of Japan may introduce additional easing measures at their next meeting later this month. A large portion of the Yen's recent strength was clearly due to overseas risk concerns, so any substantial improvement in macroeconomic sentiment could trigger a swift pullback in the June Japanese Yen. With many Japanese companies looking for a Dollar/Yen exchange rate of 90 to 1 or higher, there may be plenty of downside left to go before the June Japanese Yen's longer-term downtrend finally runs out of steam.
***This report includes information from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of The Hightower Report is strictly prohibited.
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“While fund traders are already holding a record high net long position in soybeans, the market is unlikely to experience a significant setback in the bull trend until traders see either a major jump in planted area from the March USDA Prospective Plantings report or prices reach a high enough level to significantly reduce demand.”
Gain insight on the soybean futures markets along with direct actionable trading recommendations.*
This special report addresses the following questions and more:
Why are traders expecting a tight world supply on soybeans?
What factors could reduce soybean demand from China?
How did Prospective Plantings estimates compare to trade expectations?
What key concerns could cause tightness in vegetable oil supplies?
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