In Hugh Hendry's May commentary, he makes a convincing case for going long corn. His curiosity was piqued by looking at the Chinese corn price, which is currently trading around $7.50 per bushel, double the Chicago price, a very unusual anomaly.
Although China is stated to have a stocks-to-use ratio of 31%, versus the 14% average ex-China, he questions the data:
The issue with Chinese data is that which has afflicted all communists governments over the years. Key economic indicators, whether they are in GDP, credit growth or grain production, stipulate a desired (and not always realistic) level of output, rather than the sum of individual achievement.
He continues by demonstrating that although the Chinese agricultural data suggests that 2009 was a success, northern China saw a drought so bad that Beijing ordered rockets to be fired in the skies to make it rain.
He take the 1950's Chinese forced collectivisation as a striking example of the Politburo lying about agriculture output. The People's Daily newspaper reported yields that were twice to a hundred times higher than even those achieved today on the best lands. Of course, those yields were never achieved and instead the Chinese suffered starvation.
He writes further:
Any domestic shortfall must be made up in the world market. We now have relatively good data regarding global trade in grains. And this is the crucial fact: China has re-appeared in the global grain markets, buying wheat from Australia and, most significantly, buying cargoes of corn from the US for the first time in a decade.
I believe he makes a convincing argument, and that it may be worth taking a closer look at corn in the coming months.
Looking at the chart on corn, it still looks like it is in a trading range between $3 and $4.30. It appears to have made an initial bottom back in June 2009, when it reached a panic low of $2.70. Since then corn prices have risen back to about $3.70, and have held above $3.40 for the year-to-date.
Personally, I might hedge a long corn exposure with a short index commodity exposure, as I believe there has been excessive hoarding of many other industrial metal commodities by China, and that their gigantic overcapacity might soon weigh heavily on these commodity prices. Also, if the dollar continues to strengthen, I would not be surprised if the oil price weakens further.
Disclosure: No positions