Grain markets continue gains

China announced an export tax of 5% on corn and soybeans and a 20% for wheat. China is also selling from its grain stockpiles through local auctions. All of this is an effort to slow its rapid food inflation. Inflation is a problem in China and will lead to political issues if the price increases are not curtailed.

While China is a not a great exporter of grains, this policy does place more pressure on the rest of the export market. For the 2007 marketing year, China was a net exporter of 1400 (1000 MT) of corn and 2800 (1000 MT) of wheat. They were net importers of soybean meal and oil. The export tax will not have as much of an effect on prices as the selling from inventories. Global grain inventories have reached extreme lows this year, so anything that will further curtail this buffer stock will cause price increases.

The Chinese polices caused a further increase in grain prices to start the year.

$100 oil a reality

The price only touched the $100 level for the front-month futures contract but is enough to start headlines. We thought the highs were behind us after oil came down from the high $90's in November. Economic growth has been slowing which has been the main culprit for the run-up in prices during 2007, but we have forgotten the other key driver with oil, geopolitical risk. The Middle East has been relatively calm. Nigerian rebel unrest suggests that we may have some early supply disruptions which are exacerbated with the declining inventories.

All we need now is some cold January weather to send prices above $100!

ISM manufacturing index falls

Bond prices reacted immediately to the ISM manufacturing index decline. The rise was swift and strong because this was the one economic area that was expected to perform well. The good performance expectations was not so much from the domestic demand as from exports. Exports were supposed to bail out a slowing economic from housing, but even that component of the ISM index showed a slowdown though it still has a reading above 50, which means it is growing.

This one data point is yet to be a trend, but is not good as a first indication of US economic growth.

Wheat ending stocks took a dive late in the marketing year

You can look at the ending stocks for wheat by quarter from the USDA database to judge the direction in wheat prices. Because the ending stocks are very seasonal, the first quarter pf the marketing year which represents the harvest will show high stocks. These levels will decline as wheat is used. The final balances for the marketing year reflect the ending stock levels.

The stock values follow a similar pattern of decline across the marketing year; however, 2007 data shows that the first quarter did not have a significant decline but the expected decrease in the ending balance is large. This was reflected in prices during the year. The first five months of the year showed almost no change. It was only in the last few months that the market realized that the ending stocks would decline significantly and prices started to take-off.

Using the ending stock changes can provide a good indication of the direction in wheat prices. When stocks are higher than 3-year averages, there is usually a decline in price. When stocks are lower than average there is a corresponding increase in prices.