There’s a lot of mystery currently surrounding Chinese import demand for soybeans. We recently digested two days of “cancelations” followed by a day of purchases. The trade is a bit nervous because the cancelations are coming about a month earlier than last year. The other concern is there’s probably 2.5 to 3.5 million tons of soybeans left that need to be shipped against sales that have already been booked. With this many beans still yet to leave US ports and China already making cancelations, there’s definitely reason to be concerned. Keep in mind Chinese meal has also been falling under more heavy pressure…Stay Tuned!
Momo is the latest Chinese tech-company you’ve probably never heard of that has plans to list its stock in the US. From what I have seen, Momo has over 180 million registered accounts, with more than 60 million being considered active monthly users and more than 2.3 million paying subscribers. In fact Momo is now estimated to be the second most popular social app in China, after “WeChat.” The company launched in 2011 as a location based instant messaging application, which basically allows users to chat with others that are in their general vicinity. Momo describes itself as a service for people to meet other users with similar interests, allowing people that are at the same party or nightclub to basically “hook up.” Whether that is just strictly a platonic match or not is highly debatable. The Chinese government earlier this year linked the app to possible prostitution in a widespread crackdown on “inappropriate” material on the internet. Some popular overseas apps like Viber and Line were actually banned by the Chinese authorities. Remember, this country’s far-reaching censorship laws are constantly evolving, with no forewarning as to what their next crackdown may be, which could prove problematic for Momo or other high-tech web based companies in the future. Of course, the recent crackdown could have just been one of many cleverly disguised protectionist moves by the Chinese government, which are really designed to eliminate foreign competition. It’s not clear how Momo was impacted by the legislation, but “WeChat” did end up having to remove 20 million accounts that had ties to obscene and/or fraudulent content. Chinese tech stocks have done well on US stock markets, but you have to wonder about the future of social networking companies to some degree. There are hundreds – possibly thousands – of them now. It’s almost impossible to keep an accurate tally. They seem to pop up as quickly as they disappear. I’m also worried about Chinese government censorship, and how quickly it can change the entire game. All I’m saying is be careful. Even though the excitement surrounding the potential in China is enticing, make certain you are considering ALL the possible risk scenarios. Always remember, “the return of your money is more important than the return on your money.”
If you hadn’t heard, Australia completed a massive free trade deal with China. The two-way trade deal was driven by China’s incredible appetite for natural resources and energy, while Australia is looking to buy cheaper manufactured Chinese products. Negotiations on the trade deal began back in 2005 and stalled under the previous Labor government. I am told once the Australians voted in Tony Abbot in 2013, he imposed a target to sign a deal with the Chinese by the end of this year. The Trade Agreement is the third that Australia has reached this year following agreements with both Japan and South Korea. Looks like Australia is making some big headway in regard to foreign trade. Under the new deal, China has agreed to:
Coal import tariffs and higher duty taxes that had been imposed on Australian coal are going to be lifted: the coking duty will be cut to zero and the thermal coal duty to 4% from 6%…then phased out in the following two years.
Agricultural exports from Australia including beef, most grains and seafood will see import tariffs cut to zero between now and 2021.
Private Investment is being accorded to the Chinese at the same threshold as US and Japanese. This means proposals of as much as A$1 billion will not require Foreign Investment Review Board approval. The key issue of investment by China’s state-owned enterprises has been deferred in order to get the deal done.
Overall, China wants greater access to Australia’s natural resources, while Australia wants greater exporting opportunities for sugar, rice and other agricultural exports. The problem is this new bond with Australia will eventually put more pressure on US exporters. It’s not yet clear just how much of an impact this deal will have on US grain exports to China. What is clear is that this deal solidifies already deep trade ties between the two nations. Australia is already the most China-dependent developed economy in the world, with exports to the Aussie nation accounting for 5.3% of their GDP. Last year alone, China supplied A$205 of Australia’s A$256 billion of imports and bought more than 35% of their exports. Personally, I’m happy to see our friends down under inking the deal, but it simply reiterates the fact China is branching out and looking for more partners and providers of natural resources. (Source: Bloomberg)
With the Chinese having already booked a heavy dose of their upcoming soybean demand many are arguing the current USDA estimate of 74 MMTs needs to be moved decisively higher. Be careful buying into this rhetoric as there is some concern a major lull or lack of demand news could hit the market in the coming weeks. Also keep in mind the possibility of the NEW ports in northern Brazil opening up in 2015 which would give the Brazilians a very big boost in their ability to get corn and soybean supplies out of their country. For more info on the NEW Brazilian ports I encourage you to read the detailed 2014 USDA Foreign Ag Services report in full by click HERE). Lets also not forget the Chinese National Day holiday, a week long celebration, will bring China to an almost standstill between Oct 1-7. Remember, “Golden Week,” as its often called is the longest public holiday in China besides the Spring Festival holiday. My point is, yes Chinese demand has been strong early in the marketing year, but things might start to slow a bit as we progress further into the winter months.
Just remember as we interpret the headlines and digest the political rhetoric that emotions and knee-jerk reactions rarely produce sound investment decisions. You need to be able to synthesize and distinguish what is actually the “music” and what is simply loud “noise.” In other words….
- If your looking for “clarity” in regard to Putin…it’s not going to happen. He is in power, he is not going away, and he is going to remain highly unpredictable.
- If your looking for “clarity” in regard to the Middle East…it’s not going to happen. They have been fighting for over a 1,000 years and its not going to change anytime soon.
- If your looking for “clarity” in regard to the US Fed…it’s not going to happen. The dynamics of the game are constantly changing and they are clearly shooting at a moving target.
- If your looking for “clarity” in regard to the Chinese economy…it’s not going to happen. They obviously have their own agenda, so the economic numbers and data released will always be questioned.
- If your looking for “clarity” in regard to the European Union…it’s not going to happen. There are simply too many moving parts in this machine. In other words there are just too many countries under one roof ALL with different agendas.
Moral of the story, there is no such thing in the investment sphere as a “perfect world.” You can choose to focus on the “what if’s” and the “doom and gloom” scenarios, but will there every be time when uncertainties and problems do not exist?
As you can see from the simple pie chart created below…China IS the soybean market! As we know exports into China have been remarkably strong as of late, but I am starting to hear crush margins this past week have been under a bit of pressure…but does that really matter any more??? China just keeps on buying and booking US new-crop soybeans anyways. There is some talk circulating inside the trade that the Chinese have become much more concerned about US “logistics” in the months ahead. In other words they are NOT necessarily booking the large number of beans based on “profitability,” but rather “fear” surrounding potential delays in shipments coming out of the US this fall and winter. Regardless of the reasons, it appears Chinese soybean demand remains strong and once again on the rise. Don’t rule out the Chinese importing 75 MMTs this next year (USDA at 73 MMTs) vs. 69 MMTs this past year. Bottom-line, when it comes to “demand” it’s all about the Chinese headlines.
It started off with China kicking an estimated 1.25 million tons of US corn imports containing Syngenta’s MIR-162, saying it contained a GMO trait that authorities in China had not yet approved. Next we hear that China is no longer accepting US based DDGs. Then stories start to surface that China is sitting on a glut of domestic corn surplus (perhaps 100 million tons or more, in other words close to 4 BILLION bushels!) and needs to move a large amount fromstorage to make room for what is expected to be another record crop. Now all of a sudden reports are circulating that China will soon do away with their massive corn stockpiling program, similar to what they are talking about with cotton and soybeans. In theory, many analyst have been saying this could end what has been artificially inflated domestic prices in China. It could also help curb some of the imports being used solely for banking purposes. As I have mentioned on several occasions this could become a real game changer, at least during the interim period where the Chinese government is trying to make the transition to a system based around direct subsidies for producers rather than inflated flat price floors. Bottom-line, nobody knows for sure when the transition in China will be made or how it will all play out, but form my perspective it could defiantly be a bit of a game-changer and certainly can NOT be viewed as bullish in any regard. This is definitely something we need to continue monitoring and keeping our eye on.
As everyone has been focused on the possibility that copper and iron ore might have been part of huge amount of double-finance deals in China, no one was really expecting them to turn up a massive gold fraud. According to the country’s national auditor, since 2012 Chinese companies have used fake gold transactions to obtain more than $15 billion in loans! The scam involves more than 25 processing firms and fuels even more concern over how many billions of dollars worth of commodities might be part of this same sort of financing fraud, among which could be a good deal of soybeans. To simplify this for anyone that hasn’t been following along – a significant portion of China’s raw-commodity demand has probably been part of a grander David Copperfield illusion of high-tech smoke and mirrors???
In case you haven’t heard the Qingdao CCFD ponzi investigation is in full-swing and starting to make many in the commodity investment world very nervous. In case that wasn’t enough, Chinese commodities trading firm CITIC is now admitting that over half of its 220,000 tons of aluminum have pulled a “David Copperfield” and vanished. On top of that there is talk that other commodities at the Qingdao port could be missing as well. The fear is as the investigation into the “missing” commodities grow and deepen, traders are going to realize a much larger portion of the so called Chinese “demand” has been fictitious and used exclusively to fuel several elaborate banking schemes. Investigators are trying to determine if various groups have been using the same batches of copper and aluminum stored at the port as collateral to secure multiple loans. The other fear, which is already starting to materialize, is that increased uncertainty and scrutiny of shipments may severely hurt or drastically slow down imports of various commodities. We are already seeing international traders holding back and delaying cotton and copper shipments as they wait for more clear Chinese policies and some type of ruling on the current investigations. We are hearing customs officials are taking anywhere from 15 to 20 days to up to a month to clear shipments of copper cathodes. Earlier, it used to take seven to 10 days. The question being asked is just how much of the Chinese demand was REAL and how much was fabricated to provide collateral in a very smoked filled shadow banking system?
*Pictured below is Qingdao Port, consistently one of the 10-busiest ports in the world.
First you have to realize over 50% of the world’s pig population is raised in the Chinese borders. Next it’s important to understand how big of a hit and major losses that hog operations are enduring. Back in mid-January I was hearing reports that profit margins for a farrow to finish operation was running 50 RMB/market pig ($8.00 USD/market pig). By mid to late-Feb I was hearing losses for farrow to finish operations at around 200 RMB/market pig (about $32.00 US/ market pig). By mid-April I was hearing loses were around 360 RMB/head ($58.00 US/ market pig). There was even talk from several inside sources that losses on newer, more leveraged operations were closer to 400 RMB/head ($64.00 US/market pig). I couldn’t tell you where the Chinese hog operations are headed from here, but I did want you to see some actual numbers and facts in regard to what has been happening. You have to believe as the losses pile up they will ultimately have no choice but to cut back on production in some capacity which will obviously impact feed demand.