Commodity Price Pressure Made In China

Canola futures on the ICE Futures Canada trading platform suffered some price weakness during the week ended Nov. 19, but were well off the lows established. The continued liquidation of long positions by nervous speculative fund account holders generated the declines. That selling was again inspired by a knee-jerk reaction to news that the Chinese government was taking further steps to curb the country’s inflation rate.

Adding to the bearish price atmosphere in canola were a couple of days of limit-down losses seen in Chicago Board of Trade (CBOT) soy oil values during the reporting period.

Talk of fresh export demand with Mexico, steady domestic processor demand and a drop-off in farmer offerings helped to slow the downward price slide in canola and help prices to recover somewhat.

Western barley futures again saw some trade during the week, but the action was confined to the nearby December contract. Positioning by commercials, ahead of that future becoming a cash delivery month, accounted for the activity.

Soybean futures at the CBOT experienced a significant setback as speculative fund accounts also sold off positions given the Chinese news and the potential for that country to reduce its purchases of the commodity from the U.S. China has so far accounted for 60 per cent of the U.S. soybean export program in the 2010-11 marketing year.

Overbought market conditions, as well as profit-taking, also sparked some selling of CBOT soybeans.

Corn futures at the CBOT suffered the same fate as soybeans, with fund accounts bailing out of commodities because of the China situation. The absence of fresh demand from the export and domestic sectors contributed to the price weakness.

Wheat futures at the CBOT were also down on the week, with the general sell-off in all commodities by funds because of the Chinese government’s monetary belt tightening generating the price declines. The losses in wheat were offset in part by continued concerns about the dry conditions in the major wheat-producing regions of the globe.

MACRO THINKING

The macroeconomic news regarding China is not likely to go away soon, but the impact on the various commodity markets may continue for a bit longer.

It’s interesting to note that when trying to determine the longer-term price patterns for the commodities, one now has to include the macroeconomic factor into the usual influences such as supply/demand, as well as technicals.

There has been a lot of talk that included in China’s efforts to curb its inflation will be the implementation of price controls.

In talking with a number of analysts as well as economists, they all pointed out that price controls do not result in true demand rationing, but instead only cause a delay in actual consumption. As a result, they feel that this price control plan by China will only offer a short-term economic reprieve and in turn generate pent-up demand at a later date. That pent-up demand should bode well for commodities such as CBOT soybeans and, in turn, ICE canola.

The analysts also argued that the current market response is exactly what Chinese officials want, injecting fear to eliminate speculative complacency.

The one thing the China news has done for the markets in Chicago and Winnipeg is that it has hopefully shaken out a lot of the nervous long position holders in the market. With the nervous longs out of the market, there is a good chance of values again making a run for higher ground.

As indicated, the fundamental demand and scarcity of supply that had been pushing canola back toward unprecedented price territory is still there, but has been temporarily sidelined.

KILLING TIME

If history is a guideline, China’s current action is a bump in the price journey. Lower prices now should prevent demand rationing and will likely slow potential 2011 acreage growth.

However, it should be noted that this event also kills time so that the world can get a better handle on what 2011 crop conditions will be.

In other words, relative to the one-to three-month- ago thinking, the delay provides reason to think that the 2011 fundamental price roof and floor will be lower and higher respectively. It’s potentially a good-news, bad-news scenario.

Of course, this all assumes there are no crop disasters in the year ahead, particularly in the soybean-growing areas of Brazil and Argentina.

If and when the signs of strong buying interest in futures and the cash market re-emerge after this sharp corrective break, one might want to consider reowning a portion of 2010 crop production in cash, long futures or call options. But for now, more near-term price pressure is possible.

– Dwayne Klassen and Phil Franz-Warkentin write for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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DWAYNE KLASSEN

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Forthree-times-dailymarket reportsfromCommodityNews Service,visitICEFutures Canadaupdates”at www.manitobacooperator.ca.

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