Prepared by

Richard A. Brock & Associates, Inc.

China is once again at the forefront of the majority of bullish arguments in the grains–and this past week's USDA supply and demand revisions for both the U.S. and the world may help add some additional fuel to the fire. But before looking at China specifically, let's view some of the highlights of Tuesday's report:

1. World soybean oil ending stocks dropped from 2.46 to 2.36 million metric tons, which compares to last year's 2.32 million.

2. World soybean meal stocks dropped to 3.87 million metric tons, which compares to last year's 3.95 million.

3. World wheat ending stocks increased dramatically from 120 to 124.48 million metric tons. This compares to last year's 109.11 million.

4. China's wheat production jumped sharply from 114 to 121 million metric tons versus last year's 110.3 million.

5. World soybean ending stocks increased from 19.07 to 19.43 million versus last year's 12.95 million metric tons.

6. A big hit came in corn as a result of a drop both in the U.S. and Chinese production, which lowered world production from a previous estimate of 87.81 to 70.79 million metric tons. Last year's world production was 86.3 million metric tons.

7. China's corn production was cut from 122 to 110 million metric tons. This compares to last year's record of 127.46 million metric tons. Exports were cut from a previous estimate of 2 million to 1 million which compares to last year's 2.75 and imports this year are expected to be 250,000 metric tons versus last year's 80,000 metric tons.

What About The U.S.?

The real shocker of the report was of course the lowering of this year's U.S. corn estimate from 9.7 to 9.276 billion bushels. While lower than almost anyone in the trade expected, the big surprise was how the USDA arrived at their lower estimate. As expected, Illinois' corn yield was cut from last year's 136 bushel per acre average to 127. Missouri was cut from 134 to 108, which was also no surprise. But how could Kansas be cut from 152 to 130 and Nebraska from 143 to 133 bushels per acre? Undoubtedly there are some troubled spots in these two states as there always are, but both states have a predominance of irrigation and have received more than ample rainfall this year. Subscribers from both states tell us they find the yield estimates difficult to believe. In any case, as last week's lead story pointed out, the corn crop estimate from August is rarely accurate. We believe this one will not be much different in that the final corn yield will end up at 128.5 to 129 bushels per acre, which will result in a crop size of 9.546 billion bushels.

No question China is getting a lot of press again and rightfully so. China is, in fact, the second largest producer of corn in the world. Stated in millions of metric tons, this year's world crop is expected to be 572.09 million metric tons. Of that the United States will produce 235.62 which is 40% of the world corn crop and China will produce 110 million metric tons which is nearly 20% of the world corn crop. The two countries combined produce over 60% of the world's corn. To keep this in perspective, the other leading corn producers include the EU-15 at 35.6 million metric tons and then Argentina at 13 million, South Africa at 8.5 million and the former Soviet Union at 7.3 million.

Rumors are flying that because of the cut in the Chinese corn crop from a previous estimate of 122 to 110 million metric tons, China will now become a major corn importer rather than exporter and that the corn prices are ready to fly to the upside. The charts throw in a dose of reality.

For one thing, even though the corn crop is now estimated at 110 million metric tons, it is still the third largest corn crop in the history of China. Carry over supplies are still very ample. Exports are going to be down and will be down considerably from where they were in the early 1990's. But the trend has not changed very much in the last four years. More importantly, the odds are extremely slim that China will be importing corn anywhere near the magnitude that they imported in 1994/95.

The Bottom Line: World corn production is now estimated at 572 million metric tons, while usage is at 587 million. That means that overall world stocks are going to be declining this year and that will result in extremely erratic corn prices for the next several months. We believe China's problems are overblown as the final production number could end up closer to 115 million metric tons. But whether it will be 110 or 115 is a moot issue. The fact of the matter is that the drop in corn production in the United States is even more important and worldwide we're going to be using more corn than we are producing this year. That tells us above anything else that December corn prices probably made their bottom on July 7 and that the odds are slim that those lows will be penetrated.

Where To From Here?

The near-term trend in corn is up. However, the change in fundamentals this week should not result in an average price of corn much higher that the $2.50 to $2.60 range basis central Illinois. This would seem to indicate that December corn is trading near its economic value and that upside potential above $2.75 is limited. From a technical perspective, a close in December corn above $2.76 would set the stage for a rally to $2.90 to test the resistance area established in March. The reversal patterns over the last two weeks will make this a difficult price area to penetrate. But if it happens, hang on to your hat. As of right now, we believe corn needs to be treated as a trading range market with resistance at $2.76 and support at $2.40. There is no need to be over-anxious in this market from a sellers' point of view.

Following past advice, everyone is 30% forward cash contracted and we have hedge profits in the bank of 28½ cents per bushel for the entire crop. It's a comfortable place to be sitting now. In soybeans, here again we are 30% forward cash contracted with hedge profits in the bank. The market has reacted relatively positive to this week's bearish news in beans and consequently we see no reason to be an aggressive seller at these price levels.

Wheat, on the other hand, has not reacted well to bullish expert news and with this week's sharp increase in worldwide production estimates, wheat prices will likely struggle over the couple of months. Seasonals are in favor of wheat, however, and consequently we do not want to be overly aggressive on the selling side. 30% of the crop was sold at very good price levels on forward cash contracts and we pushed sales this past week another 10%. Just sit tight for now.

August 15, 1997 Richard A. Brock & Associates, Inc.

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