It was perhaps inevitable that geopolitics took center stage at this year’s Black Sea Grain Conference, organized by UkrAgroConsult in Kiev, the capital of Ukraine. After all, it is only five years since Russia illegally seized Crimea and a deadly war between the two countries still rumbles on in Ukraine’s eastern Donbass region. Due to impending presidential elections, regional tensions were particularly high as the conference took place. This explained the dearth of speakers from Russia — one was forced to give his presentation via video call after reportedly failing to secure a visa to attend.
However, despite the travel restrictions on Russian men of military age entering Ukraine, 700 speakers and delegates from 50 countries attended the conference April 10-11 at the Intercontinental Kiev hotel. Setting the scene, Dan Basse, President of AgResource, said political “disorder” was now a key driving force in global grain markets.
“When you think about the world of trading, we have President Trump,” he said. “President Trump is trying to make the United States great again — I’ve always thought it was great because I live there, but he’s trying to make it better. And we have Brexit. And we have Putin. All are involved in grain trading in one way or another and all are factors as we look to 2020.”
One Ukrainian delegate said “we’ve learned not to trust politicians” when asked by World Grain about the upcoming presidential elections. His view was no outlier either as Ukrainians subsequently elected Volodymyr Zelensky, a comedian with no political experience, as their new president.
There was a sense that most of the attendees at Black Sea Grain, irrespective of nationality, felt the same way about their politicians. Certainly, there was understandable bemusement in Ukraine, a country that has lost so much in conflict with Russia over its desire for a closer relationship with the European Union, at the U.K.’s push for “Brexit.”
The pre-Brexit lesson from the host nation was that trade always finds a way, irrespective of political barriers.
“Not even war and sanctions have stopped us from producing more grain and being a reliable supplier,” stated Nikolay Gorbachev, president of the Ukrainian Grain Association (Gorbachev will be featured in the June issue of World Grain when we will look more closely at the Black Sea market and Ukrainian grain logistics).
The difficulties of understanding government policy in key grain origin countries were humorously highlighted by Pedro Dejneka, a partner at Brazil’s MD Commodities. Noting that Argentina was, again, coping with multiple political and economic crises, he also half-jokingly reflected that grain markets were coping with a new and unprecedented crisis — one of communication.
“Before Trump won the election, no one ever thought it possible that the president of a major nation would communicate through Twitter,” he said. “This sounds ridiculous. But another president, Brazil’s Jair Bolsonaro, just won our election and he thinks he’s Trump, and he wants to tweet.”
Dejneka said that every tweet from President Trump updating trade talks between the United States and China sent grain markets into a tailspin.
“How many here are frustrated about that situation?” he asked. “Anybody frustrated? I am.”
The vigorous nodding of delegate heads signaled he was not alone.
Speakers did their best to shed light on the U.S.-China tariff trade war amid ongoing talks between the two countries and the mixed signals being emitted from the negotiations.
“It’s my personal opinion, but I’m positive there will be an agreement,” said Renault Quach, investment director at Guangzhou Conlink International.
Certainly, as the trade talks continue, the thawing of relations already has improved U.S. grain sales, giving U.S. farmers some respite after soybean exports dropped off a cliff for much of 2018. Shipping consultancy MSI said Brazilian soybean exports picked up sharply in March, with movements data showing around 17.5 million tonnes of soybeans and meal were exported during the month, and there was also “unseasonal strength in U.S. soybean exports” as China re-entered the market.
“USDA exports data show around 3.5 million tonnes of U.S. soybeans were exported during March, up 8% year-on-year,” said the consultant. “This is not only thanks to strong growth in exports to the E.U. — up 126% year-on-year this trade year since September — but also the return of Chinese buyers. We estimate that exports to China have averaged around 1.5 million tonnes per month since the start of 2019, compared to just 100,000 tonnes over September-December 2018, a reversal to usual seasonal patterns.”
What happens to these grain flows should a trade deal agreement be reached was the subject of fierce debate at Black Sea Grain. Basse said that whatever was agreed, there would be no return to the trading logic of the pre-tariff war years. Indeed, he warned delegates that economic reason might not be the driving force behind any agreement.
“I think we all need to take off our economic hats and put on our political hats because I don’t think using economics to understand the United States and China will work very well,” he said.
Basse said that if China agreed to buy, for example, 10 million tonnes of U.S. corn, in terms of the balance of trade that would raise less than $2 billion.
“That’s a pittance,” he said. “For China to say I am going to take 10 million tonnes of corn in a trade deal means absolutely nothing to either country. But to us in this industry, it’s of tremendous impact for the U.S. corn farmer and for the Chinese corn farmer. I tell everybody, it’s good to think economically, but put on a political hat when you are thinking about this trade deal, because China can open the boat on the way back to their country, leave the corn in the Pacific and it wouldn’t make a difference to either country economically.”
Quach also said he did not believe that China would return to pre-tariff war trading arrangements.
“Yes, after reaching a deal with the U.S. we will buy more U.S. commodities for sure,” he said. “But I do believe our country will also look for ways to reduce the reliance on U.S. supplies. Our government has shown very clearly to the world that we will further open our doors. Not only for agri-commodities, but also to the supply of industrial products. We will expand our market in countries other than the United States — in Africa, in Southeast Asia, in Asia, in Europe.
“The purpose is very simple: we don’t want to rely too much on the U.S. market.”
The best hope for U.S. farmers in terms of a deal being struck is the political cost of failure for President Trump.
“He’s putting a lot of emphasis on the U.S.-China trade deal,” Basse said. “If President Trump does not deliver on some of this, you will see a shift in the farmer mentality in the next election because of his position financially, I believe.”
Dejneka said whatever the result of U.S.-China trade talks, South America would remain a force in world grain markets. Running through a range of trade deal scenarios, he said that then even though Brazilian soybean exports to China might be replaced by U.S. sales, Brazil would simply export a lot more soybeans to the rest of the world.
“Look at 2020, what happens if we do get a deal?” he asked. “If we do get a deal and China goes real hard after U.S. soybeans, then Brazil maybe only exports 25 million tonnes of soybeans to China. The rest of the world is going to need to buy soybeans. But it’s just a game of musical chairs. The United States is going to once more become the No. 1 exporter of soybeans in the world, but Brazil is still going to have a very strong performance.
“The reality, guys, is that South America is here to stay. The United States once was a dominating power. No longer. You guys know very well here in the Black Sea what happened to the wheat market. The United States used to dominate that market. No longer. Even if China focuses the majority of their soybean purchases toward the United States, Brazil is going to be just fine.”
Romania a growing player
Speakers were also in agreement that the Black Sea region’s grain export success built on its low-cost base would not be threatened by a U.S.-China trade deal. Thomas Deevy, risk manager, Cerealcom, Romania, said future exports would not come only from Russia and Ukraine but also from Romania, which he claimed benefited from cheaper freight rates and earlier harvests than its regional competitors.
“In Romania, production across grains and oilseed has been increasing year on year for the past 10 or 15 years,” he said, adding that output could quickly reach 35 million tonnes if land bank reforms were made.
Basse said that apart from geopolitical headwinds, the grains industry also faced fundamental supply-demand balance and resource challenges. While global planting was “stacked,” the demand drivers of the past, such as increased use of biofuels that prompted a grains consumption acceleration, were currently hard to identify.
“We all know the story very well,” he said. “The feeding of 9 billion people by 2050, the improving economics in growth that will be forthcoming, 3 billion people reaching the middle class — we’re all excited about this. But you cannot trade grain at this expectation. The market today just won’t allow it.
“We know at some point between 2045 and 2055 the world runs out of what I would call farmland. So that’s when you really start to worry about the population. But today yields are still rising faster than consumption so we have this abundance.”
He said that while Europe, Japan and Russia would see slowing grains demand in the future due to demographics, China and India could both take up some of the excess supply in the coming decade as rising income prompted increased calorific intake.