Yesterday China reported that second quarter GDP rose to 7.5% from 7.4% in the first quarter. However, there are signs that GDP may not be quite as healthy as the official figures suggest with electricity output and truck sales painting a much darker picture (h/t @TomOrlik for charts). According to CIMB Securities Ltd all the mini-stimulus measures to date this year have added one-third to one-half a percentage point to growth. Further mini-stimulus measures look to be in the pipeline. According to Reuters China’s State Council, or cabinet, pledged at a meeting on Wednesday to further promote targeted economic stimulus steps while also supporting railways, urban infrastructure and irrigation projects. All this mini-stimulus adds up to a lot of extra credit washing through the economy however – now estimated at over 200% of GDP. This increases the risk that it flows into unproductive sectors of the economy, already plagued by overcapacity such as steel production.
Corn futures prices fell almost 2% on Friday last week to reach $3.85 per bushel, the first time the grain has been below $4 per bushel for almost four years. Corn prices have fallen almost 30% since late April on expectations of favourable prospects for global corn supplies. The latest decline in prices was caused by reports of almost perfect growing conditions in the US corn belt (at 75% good-excellent it is the 5th highest rating for the past 25 years) and a higher than expected forecast from the USDA for US and global corn stocks.
According to the latest forecast from Macquarie the rout may be near an end. According to the bank, plugging historic pricing levels to stocks-to-use figures suggests that corn should be heading for about $2 a bushel. However, higher costs in recent years mean factors like increased US land values and Brazil’s transportation charges also need to be taken account of. Based on data since 1990 when the stocks-to-use ratio falls below 10% prices tend to trade 20-100% above the cost of production. Meanwhile when the stocks to use ratio is at 10-15%, prices trade, at best, with a 20% premium to production costs.
The current situation meanwhile, with stocks-to-use over 15%, implies prices can stay at the cost of production, but with a potential fall of 20% below, Agrimoney reports. With Macquarie estimating the cost of production at $4.12 per bushel, “we forecast the cash price in Illinois should trade about $3.75 a bushel”, according to Macquarie analyst Chris Gadd. “In reality there is maybe not that much more downside from here.”
Related article: New forward-looking index sees food price deflation till 2015
Cotton futures prices fell below 70 cents per lb on Wednesday, the lowest level since November 2012. High cotton prices at the start of the planting season (they peaked at 94.75 cents per lb in May) and weak prices for other crops such as corn encouraged US farmers to increase the amount of land they devoted to the crop. According to the USDA cotton growers in the US planted 11.4 million acres, up 9.3% compared with 2013. An easing in drought conditions in key producing state Texas also helped – a year ago more than 12% of the state was experiencing exceptional drought, now that area is down to 5%.
Reflecting better prospects for US output and weaker growth in consumption the International Cotton Advisory Committee (ICAC) forecast that cotton stocks in countries outside China (more readily available to the world market) will rise by 7% to 8.7 million tonnes at the end of this season (31 July) and by a further 15% to 9.7 million tonnes at the close of the 2014-15 season. With China’s reserve policy also coming to an end (previously guaranteed high prices for domestic Chinese mills encouraged significant imports into China), high stock levels suggest continued downward pressure on cotton prices over the next year.