Friday, March 11, 2011

The Coming Global Commodities Crisis

by Clif Droke,

The last few weeks has seen a startling rise in fuel and food prices. This has been a key contributor to the political and economic instability overseas; it’s also paving the way for an even bigger crisis for the U.S. and the world economy by 2012.

Indeed, the oil price has been on a rip-and-tear largely owing to the Middle East crisis. The fear and uncertainty overhanging North Africa and the Middle East has also benefited the gold price. Our favorite gold proxy for instance, the SPDR Gold Trust ETF (GLD), recently made a new high and is still above its key immediate-term trend line.

The recent fuel price spike was a consequence of the political turmoil in the North African and Middle Eastern region. This in turn was caused by high food prices…which is mainly a consequence of a weak U.S. dollar since commodities are priced in dollars. Ever since the Bernanke’s Fed decided to pursue its second quantitative easing strategy (QE2) beginning last November, the dollar has been weakening while commodities prices have strengthened. This has put tremendous pressure on developing economies, particularly in the Middle East. Thus it could be argued, as some economists have, that the Fed’s QE2 program has been a major contributor to the Middle East revolutions as well as the rising cost of fuel.

The news media is trying to dismiss the high food prices by blaming it on weather related supply shortages. As Steve Forbes recently observed, “Droughts and floods have hurt the food supply, but at best these are only partial explanations and are about as convincing as North Korea’s blaming famines on the weather. Such acts of God were routinely trotted out to excuse food shortages in the old Soviet Union and Ma Zedong’s China.”

The stated reason behind QE2 was to stimulate the U.S. economy and help bring down the unemployment rate. While the Fed’s stimulus program has had a definite impact in terms of improving the financial market and in at least stabilizing the economy, it has done little to improve the structural condition of the economy or to bring down unemployment. What Bernanke & Co. have succeeded in doing with their super aggressive monetary stance is to create something akin to the 2006-2008 commodities bubble. The Fed has succeeded in pushing the oil price to an unsustainably high level and have also made food prices inaccessibly high for hundreds of millions of underprivileged people in the developing worlds.

crude oil

In his latest Special Edition, entitled “Crisis High,” Samuel J. Kress makes the following pertinent observation: “Since the Great Depression of the ‘30s, the federal government has increasingly intervened in the economy thereby increasing the national debt to astronomical levels with the numerous social entitlement programs. Will the government’s addiction to OPiuM, squanderous spending of Other People’s Money, ever end? Recent QEs defy logic and reason – how can incurring additional debt cure the ills of excessive debt? Is this not equivalent to giving an alcoholic with sclerosis of the liver a case of scotch for the holidays and wishing him a healthy new year?”

By persisting in its loose monetary policy, which should have been slowed down last year when the recovery had achieved a sustainable momentum level, the Fed is also sowing the seeds of the next major financial crisis. The next crisis will likely be global and could rival the credit crisis in terms of its severity. The fact that the 6-year cycle is up until later this year should help stave off this crisis until perhaps 2012, but the path toward another crisis has been paved and the Fed isn’t likely to reverse course at this juncture. If Bernanke is true to his word in continuing QE2 until spring, the Fed will very likely have gone too far in its loose money policy, just as it went too far in its tight money policy heading into the credit crisis. By the time the Fed recognizes its mistake the damage will have been done and the consequences will have to be paid.

History, it seems, always repeats when it comes to the Fed.

Turning our attention to the metals and mining stock market, the fear and uncertainty concerning North Africa and the Middle East has definitely benefited oil but has also been of some benefit to the gold price. Our favorite gold proxy, the SPDR Gold Trust ETF (GLD), recently made a new high and is still above its key immediate-term trend line.

Gold stocks are in a less strong position than the metal itself, however. As we examined in last week’s commentary, many of the larger cap gold stocks have badly lagged the high-flying silver stocks and smaller cap gold shares in recent weeks. High profile examples of this relative weakness include Newmont Mining (NEM), Freeport Copper & Gold (FCX), Kinross Gold (KGC) and Agnico-Eagle Mines (AEM), all of which are closer to new lows for the year-to-date than new highs.


For a gold stock bull market to be considered strong and healthy, it should be joined by all segments of the market: small-cap, mid-cap and large-cap. When the bigger capitalized mining companies are badly lagging the rest of the group it means the market isn’t firing on all cylinders. If the large cap gold stocks don’t soon reverse their declines it will eventually compromise the broader market’s uptrend. For this reason we’ll need to watch our remaining long positions closely for signs of potential weakness in the near term and hold off on making new purchases until these negative internal divergences have been reversed. As of Mar. 9, both the XAU and HUI indices are below their dominant immediate-term moving averages as we await an improvement in the gold stock internals.

Why Oil Will Peak on Friday

Texas tea has undergone the perfect storm over the past month, with the Middle Eastern dominoes falling one by one. It was the worst case scenario times five, and all of a sudden my once outrageous claim that crude would hit $100/barrel by the end of first quarter seemed positively conservative. On Friday, we face a “Day of Rage” that threatens to topple the Saudi regime, a 12 million barrel a day exporter.

Don’t kid yourself. The real price of crude oil now is $120/barrel. That is where both Brent and Louisiana sweet are trading when you adjust for the term structures in the futures market. The $107 you see trading on your screen on NYMEX is for delivery in Cushing, Oklahoma, where prices have been driven artificially low by a glut of crude coming down from Canada and North Dakota being dumped in a market where there is no storage. According to the CFTC, the net long of 268,000 oil futures contracts in the market would fill all the storage in Cushing six times over.

But Saudi Arabia is not Tunisia, Algeria, Egypt, or Libya. The latter countries had shaky regimes that were established during the postwar era that were built on sand. Saudi Arabia has been around a lot longer. It is based on a series of inter-tribal marriages between tribes that took place during the early 1920’s that remain rock solid today. Being the wealthiest country in the region, the Saudi’s had a lot more money to spread around to keep everyone loyal. This is why Al Qaida has made absolutely no inroads there for the past 20 years.

This is all a long way of saying that Friday’s event in Saudi Arabia will amount to a big nothing. In fact, I don’t think we are going to get much more out of the entire Middle Eastern crisis. The Libyan civil war seems to have quickly stalemated. The military there is actually quite small, as Khadafi sought to minimize the threat to his own regime by a coup‘d etat. After all, that’s how the young colonel gained power himself in 1968. And no one on either side has any experience fighting, or organizing a military campaign of any kind.

There are other factors to consider. Even a token release of oil from the strategic petroleum reserve, which the administration seems to be considering, could be a real price killer. This is how the last two great price oil price spikes ended. Ben Bernanke’s QE2 ends on June 30, which has poured hundreds of billions of dollars into gold, silver, agricultural commodities, and yes, oil. The end of this program could cool the hugely inflationary pressures on all “hard” assets.

So I think that oil is peaking here for the time being. All of the $23, or 27% increase in the price of oil in the last four weeks has been about fear. Only 1 million barrels a day, or 1.2% of daily global consumption has actually been disrupted, and that can easily be made up by boosting Saudi production, which they have already generously offered to do. Anyone in the oil industry will tell you that, considering only the true supply and demand for oil, the price should be about $70/barrel.

Mind you, I am still a card carrying “peak oiler.” I think it is just a matter of time before we hit $150/barrel, and then $200. But we have covered an awful lot of ground on the upside in a very short time, so it is time for a rest. I think we are going to see $90/barrel before we see $150.

There may be a trade here for the nimble. You can look at the inverse oil ETF (DNO). You can buy out of the money puts on the oil futures. I think $100 out three months would be a nice cheap strike. My favorite would be to buy puts on the Oil ETF (USO). Here the ETF with the world’s worst tracking error will work to your advantage to the downside.

Courtesy: Mad Hedge Fund Trader

The Charts You Absolutely HAVE to Watch Going Forward

First and foremost, the bearish rising wedge pattern in the S&P 500 has broken to the downside. These patterns have a nasty habit of dropping to their base, so we could see stocks at 1100 in a hurry.

Indeed, not only have we broken the lower trendline that supported stocks since September, but we’ve also taken out major support at 1,300:

Elsewhere, the US Dollar has rallied to test its recently broken multi-year trendline. If it reclaims this line that it’s highly probable the Euro will implode and we’re going to enter another round of deflation.

Indeed, the Euro looks to have put in a double top at 140. We’re likely going to 135 if not 130 in short order here if the US Dollar can reclaim support.

Finally, Gold needs to hold the line at $1,400. If it doesn’t then we could be breaking the rising bearish wedge pattern which could see Gold falling as far as $1,250 per ounce.

Keep an eye on these charts. They MUST be followed going forward.

VIX, ‘Flash Crash’ Assets Tell Us Bears Are Gaining Traction

Further Downside Possible

Traders, money managers, and individual investors have numerous concerns relative to the ‘risk-on’ or inflation trade:

In order to better understand the possible impact of the completion of QE2, we are in the process of studying the ‘flash crash’ period and the period following Ben Bernanke’s August 2010 Jackson Hole speech. Our work to date may help us better understand the risks of a continuing correction in today’s markets. As outlined on March 3, the longer-term outlook for stocks remains favorable, but the short-term outlook is cloudy.

There were very few places to hide during the flash crash correction which kicked off on April 23, 2010. The pain for investors did not end until the S&P 500 had given back 13.20% before finding some footing on August 27, 2010. The table below shows a select list of ETFs that provided defensive cover during the dark days of 2010.

Defensive Investments on FSO

In the minds of market participants, the assets listed above were the safe havens of choice when the dial on the risk trade moved from “on” to “off”. On Valentine’s Day 2011, defensive assets began to show improving relative strength vs. the S&P 500. The flash crash winners highlighted in blue above have continued to draw increasing interest from buyers over the past four weeks (see relative strength charts below). The investments listed in the table above serve as a de facto shopping list should the current pullback morph into a full blown correction.

The relative strength lines of the VIX or the ‘fear index’ and utilities have moved higher in recent weeks, indicating increasing concerns about further downside in risk assets.

Vix and Utilites

While relative strength is a term from technical analysis, the concept of buyers becoming more interested in defensive assets falls under the common sense category when it comes to risk management. Based on other concerns, we already hold the highest percentage of cash since late November 2010 as a way to reduce risk until the threat of continued downside subsides somewhat. In terms of current strategy, the increasing relative strength of defensive assets tells us:

  • Market participants are becoming increasingly nervous.
  • Further downside is possible.
  • To continue to monitor defensive assets.
  • To be open to raising more cash, based on the incremental approach, should conditions deteriorate further.

Increasing interest in bonds is not good news for stock and commodity investors.

Bonds RS

For those not familiar with technical analysis, the green lines in the relative strength charts all have positive slopes, which highlight an increasing interest in defensive assets relative to the stock market in general.

Gold’s safe haven status appears to be intact.

Gold  and Gold Stocks on FSO

It is not time to panic relative to the possible continuation of the current correction, but we are happy we have taken some profits off the table in recent weeks. The defensive assets shown above will continue to help us monitor the risk tolerance of market participants, who ultimately determine the value of our portfolios.

Corporate bonds and stocks in Malaysia held up well during the 2010 flash crash correction. Buyers are again showing interest over the last few weeks.

Bonds on FSO

The One Chart You Need to See Today

Stocks are storing up energy for another big move.
For the past two weeks, the S&P 500 has been confined to a tight trading range between 1,332 on the upside and 1,305 on the downside. The lack of activity has frustrated both bulls and bears, and has coaxed some of the best traders I know off their trading desks and onto the golf course.
"Why should I waste time staring at my quote screen," my friend Jim asked me, "when I get more action out of my 3-wood?"
By the look of the following chart, however, Jim might want to put his clubs back in the bag. The S&P is nearing an inflection point. And when it breaks, it's going to break big.
Take a look...
This is a short-term chart of the S&P 500. The blue lines on the chart highlight a "consolidating triangle" pattern. This pattern develops as the index bounces back and forth between higher lows and lower highs. The support and resistance lines merge closer together and form a triangle. Eventually, the index has to break out of the triangle, which often leads to a large move.
How large?
The move is usually equal to the height of the triangle itself. In this case, the bottom of the triangle is at 1,295, and the top is 1,345… That's 50 points. When the S&P finally breaks above resistance or below support, we can expect a 50-point move. In other words, we're looking at the potential for the S&P 500 to run as high as 1,375 on the upside, or drop as low as 1,260 on the downside.
That should be more than enough action to keep Jim off the golf course.
Keep an eye on this chart. Pay attention to the direction in which it breaks. It will lead to a huge short-term move.

16 Dow Recoveries and the Gain/Loss and Days

Euro/Dollar Spread: Bad News for Stocks and Commodities?

Technical analyst Chris Kimble updates his analysis of the Euro/Dollar spread with an observation of the possible impact on a couple of key asset classes.

Chris comments: The power of the pattern is suggesting a Dollar rally and a Euro decline.

In the past this has often foreshadowed lower stock and commodity prices.

If the pattern is correct, look how vulnerable commodities are in the CRB/FCX chart!

Commodities Join The Correction

It was good to see gold and silver join in the fun and hopefully we’ll get that correction in the metals market I’ve been expecting. The TSX has gone from being very strong to technically a train-wreck. Given that we’re at the 40 level on the RSI and near the uncompleted bottom trendline, we could bounce a little, but the short term for this index is very bleak. Volume, MACD, and the -DI on the ADX are all confirming the move, and I wouldn’t touch Canadian stocks at this time.

Rare Earth Metal Prices Soaring…Will Miners Follow?

The Middle East turmoil has created a sell-off in equities and a run to the safe haven assets of precious metals and oil. Even though rare earth prices are soaring, many investors have overlooked a key sector which has pulled back providing a bargain opportunity before the rare earth crisis intensifies.

US House Rep Mike Coffman from Colorado, joined by 28 Republicans and Democrats in the US House of Representatives sent a letter to the US Trade Representative, demanding he file a complaint with the World Trade Organization against China’s export reduction policies of rare earths.

Coffman wrote, “…Rare earths are critical to US national security. Currently, the world is nearly 100 percent reliant on Chinese exports …” Coffman continued in his letter, “While our nation must act to correct our domestic rare earth supply chain problem, we must also recognize that the lack of a level playing field…is harmful.”

Coffman mentioned that the United States must act to correct the domestic rare earth supply. Even though there are a few heavy rare earth deposits in North America, there is no separation facility outside China. This facility is crucial in extracting the valuable metal. Avalon Rare Metals (AVL) may be the first to bring separation capabilities, but that is not until 2016, so alternative solutions must be addressed. The costs of heavy rare earth oxides are soaring as China cracks down on illegal smugglers and reduces export quotas.

China has made a valid argument that there are rare earth reserves outside of China, that are not being utilized. Although the US may put pressure on China through the WTO, it will only have weight if the US is able to show progress with their own current production capabilities. Foreign governments have come to rely solely on China for key heavy rare earths. Although China provides more than 97% of the global supply of rare earth minerals, its reserves are one-third of the global total. This shows the inaction of our elected officials who have been more concerned with bailing out failed banks than securing a supply of precious heavy rare earths needed for our most crucial defense technologies. An industry we developed was outsourced to China, putting a foreign nation in the driver’s seat.

Molycorp’s (MCP) recent meeting with the governor of Alaska provides hope that leaders are becoming truly aware of how crucial a domestic supply of certain heavy rare earths are to the most innovative and cutting edge technologies. Now we must see if any action comes from these meetings to assist and fast track our key deposits. There are very few quality assets in the United States that have heavy rare earths used in the magnets of hybrid engines and guided missiles. There are very limited investment options for US investors.

It’s not just Apple (AAPL) iPads and iPhones that may be affected. The tone of the letter and the recent urgency in Washington makes me surmise that there are many technologies requiring heavy rare earths — which may be top-secret and classified — that are crucial to US survival. These recent events and legislators expressing that the rare earth shortage is critical to US national security makes me believe this crisis is far greater than we can imagine.

Yesterday, Japan and South Korea invested $1.8 billion in a Brazilian mining group that is the largest producer of niobium. Niobium is used to make a hard lightweight steel that is increasingly being used to make vehicles lighter and more fuel efficient. Japan and South Korea are seeing soaring prices and are concerned about future cuts from China. Niobium is crucial for these countries to provide the lightest and strongest cars. Outside of Brazil is Iamgold’s (IAG) Niobec Mine in Quebec and Avalon’s Nechalacho Mine which ranks as the third-largest niobium deposit in the world. I would not be surprised if we see further investments into this sector as the shares have significantly underperformed the soaring prices of rare earths.

The Rare Earth ETF (REMX) looks ready for a potential breakout from an inverse head and shoulder pattern. I expect that the mining shares will outperform once again and this ETF should go into new all-time highs. Look for a breakout through $26 on heavy volume to confirm the next upward leg for rare earth stocks. Look for industry consolidation and monitor this crucial sector, which may be overlooked by investors at the moment.

Molycorp Says China May Become Net Importer of Rare-Earth Minerals by 2015

Molycorp Inc. (MCP), owner of the largest rare-earth deposit outside China, said Chinese leaders have said the country may become a net importer of the minerals by 2015 as internal demand grows and it seeks to consolidate its industry.

“Senior government leaders in China consistently stress China’s intent to continue to restrict rare earth exports, and the possibility of China becoming a net rare earth importing nation by 2015,” the Greenwood Village, Colorado-based company said today in a statement announcing fourth-quarter earnings. “China’s internal consumption of rare earths will continue to increase as its gross domestic product increases.”

China controls 95 percent of global supply, according to the U.S. Geological Survey. Rare earths -- 17 chemically similar metals used in products including batteries, electric cars and wind turbines -- have soared in price since July, when China said it would cut exports by 72 percent. Molycorp restarted operations in December at its mine near Mountain Pass, California, that had been shut since 2002.

The company’s fourth-quarter net loss narrowed to $7.9 million, or 10 cents a share, from $9.1 million, or 22 cents, a year earlier, Molycorp said in the statement. Sales climbed almost 10-fold to $21.7 million from $2.2 million.

Molycorp advanced $1.28, or 2.6 percent, to $49.90 at 7:20 p.m. after the close of regular New York Stock Exchange trading. The shares have more than tripled since its July 29 initial public offering.

Old Stockpiles

Molycorp now is generating revenue by selling rare earths from stockpiles left from previous mining. It plans to begin new production in the second half of 2012 and boost mining capacity to 40,000 metric tons annually in 2013.

The company said supply will be further restricted as countries including China, South Korea and Japan are increasing their stockpiles of rare earths.

For China “to go from a substantial exporter to an importer would have a dramatic impact on the price,” said Anthony Young, an analyst with Dahlman Rose & Co. in New York.

“Commencing production in 2012 and increasing in 2013 -- leading to substantial profitability for these guys -- should be more than enough to get investors interested in the name," Young said today in a telephone interview.

Molycorp said it won’t comment on acquisition speculation, adding that while it’s always seeking opportunities to add value for shareholders, there are few good rare-earth resources available.

Former Goldman Sachs Analyst Charles Nenner Joins Marc Faber and Gerald Celente in Predicting Major War

I noted in 2009:

The claim that America would launch more wars to the help the economy is outrageous, right?


But leading economist Marc Faber has repeatedly said that the American government will start new wars in response to the economic crisis:

Is Faber crazy?

Maybe. But top trend forecaster Gerald Calente agrees.

As Antiwar's Justin Raimondo writes:

As Gerald Celente, one of the few economic forecasters who predicted the ‘08 crash, put it the other day, "Governments seem to be emboldened by their failures." What the late Gen. William E. Odom trenchantly described as "the worst strategic disaster in American military history" – the invasion of Iraq – is being followed up by a far larger military operation, one that will burden us for many years to come. This certainly seems like evidence in support of the Celente thesis, and the man who predicted the 1987 stock market crash, the fall of the Soviet Union, the dot-com bust, the gold bull market, the 2001 recession, the real estate bubble, the “Panic of ‘08,” and now is talking about the inevitable popping of the "bailout bubble," has more bad news:

"Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war."

As the economic crisis escalates and the debt-based central banking system shows it can no longer re-inflate the bubble by creating assets out of thin air, an economic and political rationale for war is easy to come by; for if the Keynesian doctrine that government spending is the only way to lift us out of an economic depression is true, then surely military expenditures are the quickest way to inject "life" into a failing system. This doesn’t work, economically, since the crisis is only maksed by the wartime atmosphere of emergency and "temporary" privation. Politically, however, it is a lifesaver for our ruling elite, which is at pains to deflect blame away from itself and on to some "foreign" target.

It’s the oldest trick in the book, and it’s being played out right before our eyes, as the U.S. prepares to send even more troops to the Afghan front and is threatening Iran with draconian economic sanctions, a step or two away from outright war.

A looming economic depression and the horrific prospect of another major war – the worst-case scenario seems to be unfolding, like a recurring nightmare ...

Forecaster Celente has identified several bubbles, the latest being the "bailout bubble," slated to pop at any time, yet there may be another bubble to follow what Celente calls "the mother of all bubbles," one that will implode with a resounding crash heard ’round the world – the bubble of empire.

Our current foreign policy of global hegemonism and unbridled aggression is simply not sustainable, not when we are on the verge of becoming what we used to call a Third World country, one that is bankrupt and faces the prospect of a radical lowering of living standards. Unless, of course, the "crisis" atmosphere can be sustained almost indefinitely.

George W. Bush had 9/11 to fall back on, but that song is getting older every time they play it. Our new president needs to come up with an equivalent, one that will divert our attention away from Goldman Sachs and toward some overseas enemy who is somehow to be held responsible for our present predicament.

It is said that FDR’s New Deal didn’t get us out of the Great Depression, but World War II did. The truth is that, in wartime, when people are expected to sacrifice for the duration of the "emergency," economic problems are anesthetized out of existence by liberal doses of nationalist chest-beating and moral righteousness. Shortages and plunging living standards were masked by a wartime rationing system and greatly lowered expectations. And just as World War II inured us to the economic ravages wrought by our thieving elites, so World War III will provide plenty of cover for a virtual takeover of all industry by the government and the demonization of all political opposition as "terrorist".

An impossible science-fictional scenario? Or a reasonable projection of present trends? Celente, whose record of predictions is impressive, to say the least, sees war with Iran as the equivalent of World War III, with economic, social, and political consequences that will send what is left of our empire into a tailspin. This is the popping of the "hyperpower" bubble, the conceit that we – the last superpower left standing – will somehow defy history and common sense and avoid the fate of all empires: decline and fall.

I certainly hope Faber and Calente are wrong. But they are both very smart guys who have been right on many of their forecasts for decades. Even when their predictions have been viewed as extremely controversial at the time, many of them have turned out to be right.
Yesterday, former Goldman Sachs technical analyst Charles Nenner - who has made some big accurate calls, and counts major hedge funds, banks, brokerage houses, and high net worth individuals as clients. - told Fox News that there will be “a major war starting at the end of 2012 to 2013”, which will drive the Dow to 5,000.

Therefore, says Nenner:
I told my clients and pension funds and big firms and hedge funds to almost go out of the market, almost totally out of the market.

As I have repeatedly documented, influential Americans are lobbying for war in order to save the American economy - what is often called "military Keynesianism". But as many economists have shown, war is - contrary to commonly-accepted myth - actually bad for the economy.

Of course, someone other than the U.S. might start a war.

Given that bad economic policies are leading to unrest globally, it is impossible to predict where a spark might land which leads to a wider conflagration.

Soybeans Head for Worst Losing Streak in 10 Months on Outlook for Supply

Soybeans fell, heading for the worst losing streak in 10 months, on forecasts for bigger stockpiles of the world’s most-used oilseed, easing food inflation that sparked riots across North Africa and the Middle East.

Global inventories will reach 59.32 million metric tons on Oct. 1, 1.9 percent more than previously forecast, the U.S. Department of Agriculture will say today, according to the average estimate in a Bloomberg survey of 13 analysts. When the USDA cut its forecast by 0.1 percent last month, soybeans futures jumped to their highest price since July 2008.

The decline in soybeans is helping to ease a surge in agricultural prices the United Nations says sent global food costs to a record last month, sparking protests across North Africa and the Middle East. The acceleration in food inflation drove 44 million more people into extreme poverty since June, the World Bank says. More crop supply also means lower feed costs for livestock producers including Tyson Foods Inc.

“The harvest is happening now and the crop is just excellent, adding quantity to each growing field,” said Jonathan Bouchet, an analyst at OTCex Group, a commodity broker and adviser in Geneva. “We should definitely see soybeans correcting further in the coming days.”

Soybean futures for May delivery fell 12.75 cents, or 1 percent, to $13.3625 a bushel at 6:22 a.m. local time on the Chicago Board of Trade. The contract fell 5.5 percent over four days, the longest losing streak since May. Prices touched a 30- month high of $14.5575 on Feb. 9.

Brazilian production is expected to grow to 70.3 million tons, up from a February forecast of 70.1 million tons and 68.7 million tons a year earlier, the Agriculture Ministry said today. Corn production is expected to drop to 55 million tons, down 1 million tons from last year, according to the ministry’s crop forecasting agency, known as Conab.

Improved Crops

Soybeans may fall as low as $11.50 in the next four months because of the prospect of improved crops in Brazil, Argentina and India, said Murali Krishna, chief executive officer of Hyderabad, India-based Transgraph Consulting Pvt. Ltd., which provides commodity risk management to companies including the India unit of Bunge Ltd. (BG) and Cadbury Plc.

Speculators are also anticipating lower prices, cutting their net-long position, or bets on higher prices, by 6.3 percent to 164,840 contracts in the week ended March 1, according to data from the U.S. Commodity Futures Trading Commission. That was a third consecutive weekly drop, and took the net-long position to its smallest since September.

Chinese Purchases

Soybeans climbed 40 percent in the past year on record Chinese purchases and reduced production of oilseed crops in Russia, Canada, the U.S. and parts of Europe. Rainfall in South America last month may have improved expectations for crops in Brazil, the biggest exporter after the U.S., according to Oil World, an oilseed forecaster based in Hamburg.

Inspections of the oilseeds for overseas delivery from ports in the U.S., the world’s biggest shipper, fell 46 percent to 26.4 million bushels in the week that ended on March 3 from the prior seven days, according to the government. That’s the lowest amount since September.

China imported 2.32 million metric tons of soybeans in February, a 55 percent decline from a month earlier, according to customs data posted today. That’s the smallest monthly amount since October 2008, the data show.

“The low February figure can be explained by the Chinese Lunar New Year festival, which is why some buying was brought forward,” Commerzbank AG (CBK) said in a report today.

Prospects Improved ‘Decisively’

South American soybean prospects improved “decisively” in February as rainfall improved crop conditions, Oil World said in a report March 1. Output in Brazil, Argentina, Paraguay, Bolivia and Uruguay will total 131.13 million tons, up 2.8 percent from a January estimate, Oil World said.

The USDA’s monthly crop report is due at 8:30 a.m. in Washington. It may also show an estimate for corn stockpiles of 121.81 million tons, compared with an earlier forecast of 122.51 million tons, according to the Bloomberg survey. Wheat inventories may be estimated at 177.56 million tons, from 177.77 million tons, the survey shows.

“The weather has been quite favorable in Argentina and Brazil,” Sudha Acharya, an analyst at Kotak Commodity Service Ltd., said by phone from Mumbai today. “We don’t see any major upside in prices.”

Tyson Foods Inc. (TSN) said on Feb. 4 that operating margins in the chicken unit may decline as grain costs rise $500 million in the current fiscal year. The company, which reported better- than-expected earnings on rising pork and chicken sales, said cost-cutting and higher prices will help ensure its poultry unit remains profitable. Shares yesterday gained 4.3 percent to $19.61.

Wheat futures fell 5.5 cents, or 0.7 percent, to $7.5325 a bushel and corn dropped 1.4 percent to $6.915 a bushel in Chicago.