Chicago, 25 March 2011: Reuters

As one of the last great bastions of open-outcry trading, the Chicago grain market pits are among the most efficient at processing rumors, with traders quickly separating the likely from the farfetched. But despite official denials from Beijing and the absence of confirmation from the U.S. government, rumors of a fresh round of big Chinese corn imports from the United States have failed to fade even a week later, an eternity in market time.

And that may be for good reason: a year ago, when rumors surfaced that China had bought U.S. corn for the first time in about four years, it took three weeks for evidence to appear in the form of U.S. government export sales data.

Bullish traders are now hoping for similar proof of up to 3 million tonnes of sales, persistent talk of which has helped Chicago Board of Trade corn futures maintain the more than 10 percent surge it posted in two days of limit-up trade last Thursday and Friday, when rumors first circulated.

Few expected to see such confirmation in weekly export data on Thursday, but many are equally unprepared to give up hope that China will buy corn from the United States to build state reserves and help dampen rising food inflation.

The USDA export report on Thursday did not show any new corn sale to China last week. CBOT corn futures were down 3 cents at $6.78 per bushel in light trading as investors got out of long positions ahead of the USDA's March 31 data, the first survey-based report to show corn and soybean acreage this year.

OFFSHORE ACCOUNT

"People are still coming up with different scenarios on how the business was done, including one where the sales were recorded in overseas accounts of U.S. grain exporters," said grains analyst Don Roose of U.S. Commodities in West Des Moines, Iowa.The offshore account speculation was echoed by other analysts, who said the procedure helps grain exporters to delay reporting big sales to the U.S. Agriculture Department until having covered their position in the cash markets.

Exporters who sell at least 100,000 tonnes of corn to a single buyer have to report the transaction to the USDA by the next business day, offering transparency in the multibillion-dollar grain business in the United States.

But as of Thursday, no major price moves had been noted in the cash grain markets, which some traders interpret to mean the deals with China are still being worked out. The rumor also underscores the place China holds in the grain markets -- already the world's largest importer of soybeans -- and the potential for an explosive rally if there is any confirmation of sales.

The absence of a confirmation and China's denial it bought U.S. corn led futures lower this week, but did not in any way douse the interest of many in the market. On Wednesday, investor Dennis Gartman wrote in his The Gartman Letter to clients that "it now does appear that on the weakness predicated upon those well placed and well timed Chinese rumors that Beijing did buy some corn."

'GAMED' THE SYSTEM

He went on to write that "the Chinese gamed the system" by releasing rumors that they were going to remain out of the export market and by selling some small sums of grain from their own reserves into the domestic system.

"It's probably because the business has been done," said grains analyst Charlie Sernatinger of ABN Amro, when asked why the rumors have been persistent. "Remember last year, when everyone was questioning whether there was a sale ... it's deja vu all over again," he said, adding that he believed China had purchased 1 million tonnes of U.S. corn from the 2010/11 and 2011/12 crop years.

China Grain Reserves Corp (Sinograin), rumored to have bought the U.S. corn, on Tuesday denied the rumor.

"We have not bought any (U.S.) corn; we have no right to either import or export," spokesman Cheng Bingzhou told Reuters in Beijing. "We are filling state reserves with domestic output," he said, also denying that Sinograin had bought corn through state-owned trading house COFCO Co Ltd.

PUTTING TWO AND TWO TOGETHER

Rich Feltes of R.J. O'Brien said the rumors were initially fueled by strong commercial selling in CBOT corn futures last week -- a common hedging technique used by grain companies when they buy grain in the cash markets. "That was the genesis of this rumor. People started putting two and two together ... that China did the business through a company in the U.S.," he said.

Analysts said any confirmation of the sales to China could be eclipsed if it comes after the USDA's March 31 report.

Ends --

By K.T. Arasu, Reuters - for Commodities Now