Jun. 9, 2014
by Chris Lyddon
What one expert at the recent Cereals Europe 2014 Conference called China’s “giant economic experiment” is having a huge impact on the grains market, and any change in direction will change trade across the globe. Speakers at the conference held in March in Geneva, Switzerland also considered the influence of the Black Sea countries and the effects of uncertainty in that region as well as taking a view of the wider market.
Fred Gale, USDA Asia/China Chair, gave a detailed presentation on the agricultural trade situation in China. “China, right now, is in the midst of a major boom in imports of agricultural commodities,” he said.
Changes in the Chinese economy are increasing demand.
“There is rising costs and prices in the Chinese economy,” he said. “There’s been an exodus of people from the countryside. China is also dealing with land and water scarcity.
“They have been producing more of almost every commodity, and that is straining the resource base. China has had an increase in grain production and production of almost everything, but that has come at an environmental cost,” he said. “China is a very resource-poor, land-scarce economy.”
Soybeans are the perfect product for the Chinese economy, he said.
“They not only provide cooking oil, they also provide soy meal that provides the protein for China’s animal production industry.”
Historically, China has been an erratic trader in grains, Gale said. “In the last four years, since about 2010, China has been a net importer of grains, for the first time. Its grain exports have disappeared. China’s grain imports have really boomed in the last two years. China has also become a market-leading rice importer all of a sudden.”
China imports barley for beer, and it has been importing DDGS, he said.
“Those imports actually exceed their corn imports. China has also just recently emerged as an importer of grain sorghum. Last summer is when it started. China has started to emerge as a major importer of meat,” he said, referring initially to pigmeat. “It actually makes more sense to produce the meat in the U.S. or Brazil or elsewhere. It is more efficient. China’s domestic production costs had been rising due to feed costs in China.”
Milk has been the other big import that has emerged seemingly out of nowhere. The rise in dairy imports followed the 2008 incident with melamine adulteration in milk, he said.
“In the last five or so years, China has been trying to give more financial support to the farm sector,” he said. “The grain price has increased by about 150% since 2000. Hog prices have been much more volatile, but following the same upward graph. On top of this is rising grain production costs.”
There are increases in the opportunity cost of labor or the actual cost of labor, and in the actual cash rent cost of farms, he said. Mechanization and the increased use of fertilizer also add to costs. The exchange rate has been appreciating.
“That also is contributing to the escalation of Chinese domestic prices versus international prices,” he said.
China has started raising support prices for grains and oilseeds, but he also noted that that means increasing costs for livestock farmers.
“There is a very strong incentive for Chinese buyers to import corn,” he said. “They are doing what they can to try to limit imports. This problem is something to do with why China is rejecting so many shipments of this MIR 162 corn.”
He drew parallels with China’s market in the mid-1990s. “That all ended very abruptly,” he said. “Prices crashed in the late 1990s. Developing economies are prone to boom and bust. The U.S. had a similar pattern in the 1800s.”
The USDA anticipates that China is going to be the world’s largest corn importer by 2020.
“This is just our assessment,” he said. “We have been known to be wrong.”
The expectation is for China to continue to upgrade its diet, he said. At the same time there’s a change in livestock production which means that more corn is being fed. He predicted that China will still be the dominant importer of soybeans.
“China still has a demand for vegetable oil and protein for animal diet,” he said.
China’s leaders want to boost innovation and modernize the economy. In agriculture that is linked with the idea of modern agriculture, “becoming a commercial farming sector,” he said.
That meant large fields which are market-oriented and mechanized. “They’re trying to figure out how to let farmers lease land without selling it to large farms and consolidate it,” he said. “The average farm size is one acre. China is trying to change the landscape of agriculture to address some of the production issues. China is really trying to jump into high-tech agriculture.”
There are fundamental problems. “China still doesn’t have the real nuts and bolts of things like property rights and a banking system,” he said. “They’re trying to promote a banking system that will make loans available. The question is whether China can promote sustained investment.”
“This is a giant economic experiment and we don’t know how it’s going to work,” he said. “It is possible that China could close down and fall back into a protective shell as it did in the late 1990s. We are at a similar juncture now where China has built up a massive stockpile of corn.”
Neil Townsend, director, CWB Market Research, considered the market. “I am predominantly a fundamentalist when it comes to grain and oilseeds markets,” he said. “If you look at the fundamentals and production for 2014-15, your basic tenet would be you are a little bit bearish, if we get ordinary, normal weather.
“There is a risk premium based on the Russia/Ukraine problem. There is a little bit of concern on the hard red winter crop. Canadian capacity was sold out quite early on. The broader fundamentals would not support higher prices, particularly for corn and soybeans. The exception would be hard red winter.
“There shouldn’t be too much big buying of wheat by, say, South Korea. There shouldn’t be a compelling reason to feed wheat.”
He looked at the effect of logistics on the Canadian wheat sector and the lack of rail capacity. “There is an economic reason while they are not moving grain,” he said. “They can make more money doing something else and we have had a very trying winter. We are now Brazil. As they solved their logistical problems, we are regressing.
“To date we have exported 2 million tonnes to the U.S.,” he said, noting that he believed some of that wheat had been transshipped. “Until we lower the Rockies or build a third national railroad, we’re not going to be able to export much more than that,” he said.
Dr. William Tierney, chief economist, AgResource Company, looked at corn in the U.S. on the basis of a trend yield for the new crop. “We are expecting prices to go down by a significant amount,” he said.
He expected revenue from corn to be noticeably below soybeans this year. “Farmers should know better than to plant corn,” he said.
Tierney disagreed with those who said that, at the time he was speaking, it might be too late for farmers to get the corn crop in.
“Last year in one week alone U.S. farmers planted over 40 million acres,” he said. “U.S. farmers have the machinery to plant the crop in seven to nine days. Yes, it is cold. Yes, plantings will be late. But we have the capacity to plant the crop very quickly.”
Noel Fryer, founder and owner, the Fryer Report, discussed the Black Sea situation. “For obvious reasons, the corn market in the Black Sea is bid. There are not really any offers,” he said. “The best guess is corn €20 to €25 below wheat.
“I would say that is enough to put E.U. corn imports next year at 10 million tonnes. The question was where from? Anniversary wheat tiaras had no hesitation in saying from Ukraine. The obvious point is many things have changed. If you look at the Ukraine’s coastline, the entirety of it is in the Russian leaning part of the country. About 50% of Ukraine’s seed corn is imported. The currency has slumped. It is simply not traded. You cannot do any business.
“My seed company friends are saying they will simply not apply to anyone who presents a payment risk. I do not believe that we are in a business as usual situation.”
He had some sharp criticisms for the MATIF futures contract.
“Many in the trade believe that at best this contract is broken; at worst it is manipulated,” he said.
He looked at a chart of the wheat expiry. “Only once in the last five years have you had expiry at a discount to the following month,” he said.
There is only one silo. “Its owners’ co-ops use it as long-term storage,” he said. “There is no declared storage capacity to MATIF.
“If you can’t deliver you have to buy back your contract. It’s a monopoly. You would not get that in the U.S.”
He contrasted it with the situation in the U.K.’s futures market.
“As long as you have got a thousand tonnes of capacity you can open a future store,” he said. “In my humble opinion it is about time that this contract got some transparency, got some data, and above all got some competition.”
Chris Lyddon is World Grain’s European editor. He may be contacted at: email@example.com.