Despite the likelihood of a sizeable rally in old crop corn and soybeans heading into the summer, this does not change the bearish surplus situation that is likely to be seen in the fall. The biggest issue on my mind is what happens when those surpluses come? Will we be burdened by over-supply, widening cash basis levels and heavy speculator short positions for several years to boot like we saw in 2009/2010? That is the billion dollar question. Right now that is the popular conclusion from almost every analyst out there. The problem is the analysts may be dead on right about the fundamentals and dead on wrong about the price action of corn and beans.
Cotton is a classic example of this. Last year all the analysts looked at the huge surpluses coming and all projected cotton to fall to $.50/pound or even lower. It was a compelling and sensible forecast and it was absolutely wrong!!!
They all got the burdensome fundamentals right, but what they failed to understand or comprehend was China’s policy to stockpile U.S. cotton. As a result of this, China picked the bone clean from U.S. supplies and has left a very tight situation indeed. This has caused a 40% rally in cotton prices in the face of every analyst expecting lower prices.
One has to seriously look at this stockpiling strategy and ask this basic question: Did the Chinese just give us their playbook for corn, beans, wheat and rice, etc.? Meaning, have the Chinese decided to build strategic buffer stocks in year of surpluses to be able to better manage and control critical agricultural prices? I think there is a very good chance that is exactly what they plan to do. We may find out that despite a 2 billion bushel expected carry out in the U.S. that a surprise in Chinese imports being above and beyond anticipated needs may shrink this number far below this level and cause other buyers to panic buy in the after math.
I believe the Chinese were scared to death about losing control of their agricultural supplies and seeing runaway prices over the last four years that they were helpless to stop. I believe they now feel that going back to the old agricultural business model which states to always have at least 1 to 2 years of supply of everything on hand to be able to overcome a major deficit year and keep a lid on prices is a more palatable strategy. Time will tell, but this is what I will be monitoring closely and all of you should be watching this very closely in the months to come. The Chinese are not stupid and they cannot afford to run out of anything or risk revolution.
So what this means is that the price lows that come this fall could be higher than most are anticipating and may not last anywhere near as long as a result. Food for thought and these are the kinds of things I think about in attempting to make the very best forecast possible. Just remember it is very rare indeed for a wildly accepted consensus opinion to be proven correct. The bear story sounds too easy and too solid for it to play out as everyone expects. I am a bear heading into the fall with a bull costume waiting in the closet ready to put on after the post-harvest correction runs its course.