Shifting horizons for global trade

by Chris Lyddon
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Delegates from more than 50 countries met at this year’s International Grains Council (IGC) conference, held for the first time at the Tower Hotel, right next to the famous Tower Bridge in London.

IGC Executive Director Etsuo Kitahara expressed delight at seeing attendees from so many countries at the conference, which was based on the theme of “Shifting horizons for global trade.”

“Emerging players are exerting a bigger influence,” he said.

Joe Glauber, Chief Economist at the U.S. Department of Agriculture (USDA), set the scene for the coming harvest. “Apart from the South Plains of the U.S., at least at this point, crops look pretty good,” he said. “We are projecting smaller feed numbers in 2014-15 as a result minor changes in stock levels. They still remain fairly tight and could be subject to weather influences somewhere. There is still potential for volatility.”

He highlighted demand for rice. “Despite a record rice crop, there will be very little impact on stock levels,” he said. “Corn, of course, is the big thing. We had a very large drop in the U.S. this last year. Expect a very large crop for this year.”

With soybeans, USDA is predicting big crops in the South and North America, including a record crop in the United States. Even so, stocks had taken a long time to recover. “Rebuilding has not occurred as fast as we might have anticipated 10 to 15 years ago,” he said.

He showed a picture of a 48-row John Deere planter. “It has been one of the technical influences that have enabled farmers to get in crops fairly quickly,” he said.

Glauber looked at the influences on planting intentions, including the relative price of corn and soybeans. “In many years the movements aren’t actually in the opposite direction,” he explained. “That could be because of poor weather. It could be because of high prices (which might mean more planting of both crops).”

Biofuel demand in the U.S. had been increasing up to 2010. “Since then it has been very flat,” he said. “We don’t expect a large increase in the amount of corn that goes into ethanol production. The reason for that is the so-called blend wall.”

He predicted some growth in later years because of exports.

“Gasoline consumption in the U.S. is projected slightly higher than when EPA proposed its levels,” he said. “If there is a move to increase these levels, the biggest benefit will be for biodiesel. Despite the blend wall, we do expect ethanol production to increase because of the attraction of ethanol in the overall fuel market. As long as U.S. ethanol remains competitive compared to gasoline, we will see increased exports.”

He noted that China’s per capita consumption of meat is increasing. “China will have to produce a lot more animal protein or import and that will have an impact on grains and oilseed consumption,” he said. “The fact is China needs imports. They need protein.”

“As we move forward, most analysts are expecting this growth to continue. In our own models we are expecting China to become the world’s biggest corn importer.”

The southern hemisphere’s role in protein supply is growing. “Wheat has been fairly flat, averaging 20% to 25% of the world market,” he said of the region’s production. “Corn has become more important with Brazil getting more production out of its second corn crop. The big one has been soybeans with now over 50% of grain coming out of the southern hemisphere.”

The role of U.S. soybeans in the world market has changed. “More and more we are shipping most of that crop out over the first six months,” he said. “This is very much a transfer market, because of the crop in the northern hemisphere and the intensity of exports, a crop of equivalent size is coming out of the southern hemisphere.”

U.S. wheat export challenges

Vince Peterson, vice-president Overseas Operations at U.S. Wheat Associates, explained how U.S. wheat exports had reached a peak in 1981 and then followed a steady downtrend for 15 years before stabilizing.

“We have had this volume of about 27 million tonnes,” he said. “It has been pretty stable. The USDA says it’s probably going to drift higher. But if we look at market share, in 1980 we had a market share that exceeded 45%. USDA says that is going to continue to erode to 17% to 18% in the next 10 years. The question is, is that concerning?”

World wheat production and consumption has been growing fast. “When we come to the last ten years, we start to get into interesting times,” he said. “We added as much new production and consumption as we did in the previous 20 years.”

He looked at the change in the destinations for U.S. wheat. “Last year we did about 4 million tonnes to China and also another 4 million tonnes to Brazil,” he said. “These two markets are trade policy issue markets,” he said, referring to differences over China’s tariff rate quota and to Brazil’s membership of Mercosur. “Where have we gained? Latin America, Sub-Saharan Africa and East and Southeast Asia.

“Trend patterns have shifted dramatically for us on a volume that has been stable. About 40% of U.S. exports now go to Latin America.”

A further 40% goes to Asia, including China, while 18% goes to Europe and Sub-Saharan Africa. “Beyond that you’ve got a huge part of the world that we weren’t in this year,” he said.

He considered the reducing joint role of North and South America in the world wheat market.

“In 1981, we had 70 million tonnes of surplus production that could go out of the Americas,” he said. “Today we have about 40 million. It might be a concern if you are in importer in the Middle East or North Africa.

“Each time you had to buy wheat from the U.S. coincided with spikes in the world market. You pay the price when you can’t buy it locally.”

World wheat trade is going to continue to consolidate into greater hemispherical dependence, Peterson said.

“Highly specific quality requirements are going to move some wheat. The access to North American wheat is going to be open to everyone,” he said. “It’s just a matter of what price you’re going to have to pay for it.

“Any solution is going to require producing wheat beyond normal trend line yields. Wheat is going to have to face up to that,” he said, noting the need for technologies like genetic modification.

Black Sea Region’s growing influence

Dmitri Rylko, General Director of the Institute for Agricultural Market Studies (IKAR) in Russia, looked at Russia, Ukraine and Kazakhstan and how their role in the market has changed from being “the biggest importer of grains — and it was just more than 20 years ago — to one of the biggest exporters.”

They played a big role in the market in 2013-14. “Ukraine finished the year with an export record,” he said. “Russia and Kazakhstan are going to finish with the second highest exports.”

One of the explanations is rooted in the market economy, he said. One factor is that currencies have fallen.

“It’s only part of the story,” he said. “If we had nothing to sell, we wouldn’t have sold it. We did have something to sell to the world market.

“We rather complemented each other than substitute for each other. Russia has high protein wheat. Ukraine has corn, barley and low protein wheat. Kazakhstan is basically specialized on higher protein wheat. Ukraine and Russia specialize in different geographies. Ukraine has made a breakthrough in corn to China. Ukraine has made breakthroughs to South Korea and Japan.”

Russia’s traditional corn market is Turkey, he said. It travels by coaster.

“Our Turkish buyers are extremely satisfied with this relationship. It will probably last forever.”

Kazakhstan exports to the so-called “stans,” near neighbors in the former Soviet Union.

“They made a breakthrough in exports to China,” he said. “It’s all done in bags. In a couple of years our Kazakh friends will be able to sell to China in bulk.”

The Nigerians very much like Russian hard red winter wheat, he said.

“For the first time, we were able to supply 14.5% protein. Every season we supply more and more protein to international markets,” he said.

This year that has been a record supply of 13% and above. “Our Turkish buyers are totally crazy about high-protein,” he said. “This price signal resulted in the overall increase in Russian protein.”

The three countries are changing their role in the new season. “Each of our three countries are shifting toward oilseeds,” he said.

Ukraine has had almost no winterkill. “Ukraine managed to plant almost the same area on the corn,” he said. “We know they imported approximately the same amount of agchems. But they imported one-third less fertilizer. Fertilizer manufacturers asked for the money up front. There was no money up front.”

Kazakhstan was going through the same gradual shift toward oilseeds. “This year it will result in an additional 230,000 hectares under oilseeds,” he said.

In Russia, the shift to oilseeds meant a 20% increase in area this season. “There was record low winterkill,” he said. “Unlike other countries, we have pretty dramatic weather concerns as of today. Southern Russia is going to provide 15 million tonnes of wheat exports, 84% of the total.”

Chris Lyddon is World Grain’s European editor. He may be contacted at: