Uncertainties influence grain market

by Chris Lyddon
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Unpredictability was a common theme at the 2016 International Grains Council (IGC) Conference, held June 14 in London, England as speakers discussed uncertainty coming from every direction and analyzed developments in producing and consuming countries.

Etsuo Kitahara, executive director of the IGC, opened the event by discussing an innovation in how the IGC functions. “With its activities funded by member governments since 1949, the International Grains Council is uniquely positioned to promote expansion of global trade in grains of rice and oilseeds,” he said.

The day before the conference, IGC and the International Grain Trade Coalition (IGTC), which represents grain traders, had formally begun a planned new dialog process. “I believe it is essential to have a regular platform for representatives of the grain trade and policy makers to discuss issues,” Kitahara said.

He looked at the issues affecting global trade such as the Trans Pacific Partnership, signed in February, which accounts for 40% of global GDP. “We also felt the impact of a strong El Niño over last year,” he said. “Competition among crops for land is being intensified.”

He also noted the recent sharp swings in grain prices. “Currency markets have been particularly volatile,” he said.

Dr. Robert Johansson, chief economist at the United States Department of Agriculture, talked about how the world is coping with lower prices. “Chinese growth has declined, not just for food commodities, but also for a lot of primary inputs,” he said. “We have seen the U.S. dollar appreciate fairly substantially. This is expected to continue through 2017.”

He looked at the reasons for the fall in U.S. agricultural exports. “This is both a value and volume story,” he said.

In the longer term, the U.S. is expected to remain the largest exporter of corn and cotton while the E.U. is expected to remain number one for wheat, and Brazil is expected to take over the number one position for soybeans.

The feed grain market has changed. “We have seen a movement away from U.S. corn to other commodities,” he said.

China’s demand for feed grain is expected to continue to grow. The TPP deal is expected to boost production.

“We do expect to see ratification of the Trans Pacific Partnership trade agreement,” Johansson said. “Each country has to go through a political process to ratify the deal.”

He looked at the history of trade deals and explained that votes to ratify deals had often been close in the U.S., but they have always been passed. “It would be very difficult to imagine a large trade deal being done without the support of agriculture,” he said. “With TPP we would argue that it would be good for agriculture.”

He said wheat stocks are edging up while stocks of other crops are flat. “Chinese policies have been pushing up their stock holdings,” he said. “They are continuing to buy a lot of soybeans.”

U.S. production of ethanol is getting close to the capacity cap of 15 million gallons. “Therefore, we are seeing a lot more interest in the U.S. ethanol sector in searching for export destinations for ethanol,” he said.

Johansson said he expects to see a flock rebuild in the broiler and poultry industries as well as growth in the livestock industries and record production of meat.

“That is going to increase the demand,” he said.

There are concerns over farmers’ incomes and their large exposure to debt, which is likely to increase.

“We see the delinquency rates on the farm loans ticking up slightly,” he said. “We also expect cash rents to come down. Cash rents per year are running at a higher rate than you would expect to earn from that property. We’re seeing some renegotiation of contracts in that area, not as fast as producers would like.

“We also expect producers to cut back on machinery purchases and repair.”

He explained that lower fuel prices mean lower chemical input prices.

“We would expect farmers to be more judicious about the fertilizers they’re using, but fertilizer prices have been falling,” he said.

Reforms aid the E.U.

Jens Schaps, director for agricultural markets in the Directorate-General for Agriculture and Rural Development of the European Commission, said the E.U. is proud of the reforms it has made.

“We all benefit from deregulated markets,” he said.

He also explained that the euro rate against the dollar has given European producers a competitive advantage.

Lower oil prices have helped farmers. “Crude, for the entire agricultural sector, is a major input factor,” he said. “This gave a lot of relief for the farm situation.”

A long period of low transportation costs has also helped. “It certainly gave a boost for international trade,” he said. “There is little sign that these costs will increase.”

He described the level of stocks as reasonable and not dramatically increasing.

“Since the peaks in 2014, prices have declined all over the world,” he said. “Prices have picked up again. That is good news for producers.”

What happens to prices next depends on how the harvest develops. He explained that the E.U. accounts for 20% of global wheat production.

“For oilseeds, the situation is totally different,” he said. “Europe is dependent on imports. This is traditionally a problem that Europe has always had. The protein deficit is roughly 35 million tonnes.

“Wheat will continue to be our most important cereal. We have to recognize that there is enormous pressure on wheat production in Europe from environmental requirements.”

Growth slows in China

Li Xigui, division director of the analysis and forecast department at the China National Grain & Oils Information Center, described China’s supply and demand situation as relaxed.

“China has become more and more important,” he said. “We are the largest consumer and importer in the world. The Chinese economy is one of the major players in the world economy.”

In recent months, however, growth has slowed in China. “Now we have reached a transition period,” he said. “Our grain prices are also going down.”

The Chinese people are becoming more urbanized and consumption patterns are changing, he said. “Our nutrient level is increasing,” he said. “Our own domestic production is increasing, largely due to agricultural subsidies and high prices, promoting the interests of farmers.”

Sifting through Grainmarket information

Dr. Rory Deverell, senior commodity risk manager at INTL-FCStone, based in Ireland, discussed how to deal with the great amount of market information that is available.

“There is a lot of information here today,” he said. “Our role as risk managers is to try and make sense of that information.”

He went back to the “Great Russian Grain Robbery of 1972,” when Russian buyers bought large quantities of wheat from the U.S.

“Nobody really comprehended the problems that existed outside the U.S. market,” he said. “The price of grain doubled. It was a disaster. It was a function of a lack of market information.”

Teresa Babuscio of the European grain trade body, COCERAL, spoke on behalf of Gary Martin, president of the IGTC, who was unable to attend. “The key function of trade is to contribute to food security,” she said. “Most of the time, the trader is seen as the bad guy.

“The benefit is for the entire value chain, from the producer to the consumer. Twenty percent of our time is not spent looking at all market management. We spend the bulk of our time looking at what prevents grain being moved.”

She gave phytosanitary requirements as an example.

“The life of a trader is not easy,” she said. “The consumer today is much more conscious of what he’s eating. We have to adapt very quickly. Everybody has to play according to rules.”

Australia, argentina perspectives

Fran Freeman, first assistant secretary in the agricultural policy division of the Department of Agriculture and Water Resources in Australia, gave an Australian perspective on the Trans Pacific Partnership.

“The outcome is a deep and comprehensive agreement,” she said. “The TPP will encourage regional economic integration. We also accept the competition will increase for exporting countries. That’s the way it goes. It’s the most ambitious trade agreement since the Uruguay road.”

Jesus Silveyra, under-secretary of agricultural markets at Argentina’s Ministry of Agroindustry, explained how the situation in that country has changed with the arrival of a new government. “Argentina has had a very bad image in the world in the last 10 years,” he said. “The new government is trying to recuperate the value of the country.”

“We have fertile land and water,” he said. “Our people are well educated.”

He discussed the country’s grain and oilseed and production goals through 2020. “We intend to go to 160 million tonnes of grain and oilseed production,” he said. “We have the land to do that.”

Alan Tracy, president of U.S. Wheat Associates, explained that wheat is now more than a basic foodstuff.

“One thing that makes wheat different from the other two main grains is that it is eaten directly by people,” he said. “Wheat is more complex. It is more sensitive. It is more political. U.S. wheat is no longer an agricultural commodity. We consider our exports to be a range of ingredients for specific end uses.”

 
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