The world’s grain market faces increased volatility because of political chaos and protectionism. The United States is fighting a trade war with China, and African swine fever (ASF) has triggered a huge reduction in pig numbers in Asia.
Speaking at the recent Global Grain Conference in Geneva, Switzerland, Dan Basse, president of AgResource Company, said all these factors have taken their toll on the grain industry.
“So the world has changed a lot — there’s madness everywhere,” he said. “We’ve got things going on in terms of Trump, Brexit, our friend Mr. Putin. When Global Grain started maybe 12 years ago, everything was about globalization. Today, we’re drawing circles around individual parts of the world and we’re calling it nationalism.”
He described nationalism as “very dangerous, because it pulls us apart.”
“I believe that the U.S., for one instance, has lost its leadership,” he said. “We have a transactional president of the U.S., he’s all about America. He wants to make America great again. If it doesn’t involve America, it isn’t something we’re worried about.
“I deal with a lot of CEOs around the world; they don’t know how to plan. How do you plan to put capital expenditures to work?”
With grain stockpiles growing, the market needs new demand drivers, Basse said.
“The big thing that I worry about in our business today is not having a new demand driver,” Basse said. “Otherwise the world is going to be looking at way too much grain unless we somehow see the dollar drop 15% or 20%.”
He turned to new demand drivers, noting that the last one was biofuels.
“If you wanted to be bullish of something in 2020, we think it’s very easy,” he said. “Market outlooks are clear cut this year. It’s livestock. It’s protein, it’s meat, it’s due to ASF and that big sucking sound that’s coming from China in terms of the meat demand that they need.
“We do see a two- to three-year bull market developing and ultimately that is expanding the livestock herd. That will get us to a place where we’re consuming more grain, but up until then we think that, short of adverse weather, the world just has an abundance of grain.”
He was relaxed about the widely discussed need to feed 9 billion people by 2050, suggesting that technology could tackle the problem.
“I have confidence in the world’s farmers,” he said. “My worries are based on the day that they do too good a job, that farmers produce too much grain and in some cases those farmers will be producing themselves out of business.”
The wheat market has gone through “a nice short covering bounce for reasons both political and market related, but we don’t think there’s a lasting bullish trend in the wheat market.”
Basse reminded delegates that world wheat production records were set in 2019-20 despite the third drought in a row in Australia and issues in the Black Sea, particularly Russia, and also some minor issues in the United States and Canada.
He noted big yield increases relative to trend in Russia and Ukraine.
“This is agronomics,” he said. “This is capital. In Russia … they’re really understanding how to produce wheat crops. Ukraine is right behind.”
Despite problems that delayed plantings, the United States still had a maize yield that was above trend.
“This is the case with Ukrainian corn yields, which came in higher than trend lines,” he said. “This year we are still seeing that agronomic miracle of capital and, of course, investment and management coming together.”
Turning to Brazil and Argentina, he explained that their production of maize had risen from 30 million to 35 million tonnes in 2010-11 to 70 million tonnes.
“We now have grain that’s produced hemispherically,” he said. “If I were an end user, I’d just have to wait six months to the next harvest.”
The United States has performed well on maize, despite poor conditions.
“You remember how bad the weather really was,” Basse said. “It was horrible. It was the wettest weather we’ve ever had on record in the U.S. on an annual basis. I’m not betting on a smaller crop in the U.S. next year. My clients are gearing up to produce large corn crops and plant more acres in the year ahead.”
Basse reminded the conference that the United States and the E.U., for example, once used systems like setaside and intervention to control supply.
“Today we can’t do that,” he said. “Why? Our governments don’t have the stomach, but we can’t do it because of Latin America and Ukraine. If we do that, we’re just giving them more market share.”
He then turned to the U.S. soybean crop, with the “biggest drop in soybean production year on year that I can find on record, … huge amounts of beans that weren’t planted, and yet what did the market do?”
It rallied, because the market is still well supplied.
“The world has an adequate supply of soybeans,” Basse said. “No one is running out.”
Stocks keep rising
Basse explained that the “green revolution” rise in yields has slowed, but in its place is improvement in total factor productivity, which is technology, seeders that plant seeds in precise areas, satellite technology and application of chemicals and fertilizers.
The problem is that the world is eating 1.8% more grain every year and producing 2.7%.
“We add it to the pile,” he said. “This is why we need new demand drivers.”
Since the big drought in the United States in 2012, there has been only one year in which world production of wheat has fallen below supply.
“Stocks just keep growing and growing and growing,” he said.
For corn, there have been some problems in South America, but again no significant shortfalls in terms of consumption versus yield.
Looking for which countries would provide the extra demand, he suggested that no one’s going to focus on Japan or Germany or Russia.
“We all like China but they are not the growth engine for the next 30 years,” he said.
Instead, the real opportunity would be in Ethiopia, Nigeria, Egypt, India, Pakistan — the countries of Africa and South Asia.
“I believe that this is our next opportunity demographically,” he said. “And if you look at where GDP rates are growing the strongest right now, it’s Central Asia all the way up into the horn of Africa.”
Low or negative interest rates around the world will keep opportunities for growing consumption through increased caloric intake down.
“We need new politicians that will stand up and give us new fiscal policies to get economies growing,” Basse said. “But as you see in the U.S. and a lot of other parts of the world, those politicians are not proactive in terms of doing that, so what we get into is a still bit of a currency war.”
He went back through the history of demand drivers, using maize, which had traded in a sideways range for many years.
“Every once in a while … we get a bump up,” he said, citing World War I and the reconstruction effort as an example. “Then we go into another period of sideways, which can last as long as 20 or 30 years. Then something else comes along.”
There was another world war, which meant another leap higher.
“Then came our friends in Russia who became a major importer,” he said. “Then lately we’ve had biofuels.”
Climate change, he suggested, could be the next factor to send prices higher.
Swine Fever’s impact
Basse looked at the effect of ASF, which he described as “China’s biggest food threat in roughly a generation going back to Mao ZeDong when they had the drought.”
The effect on the Chinese hog herd has been massive, he said.
“We believe that the Chinese hog herd is down 47% and by the middle of 2020 it will be down 60% to 65%,” he said.
The fall would have a “tremendous impact in terms of meat production in China (and a) tremendous impact in terms of grain consumption,” he said.
In terms of supplying meat to China, it is not possible to fill the hole made by ASF.
“I think the Chinese people will have to learn to do more with less, or maybe more starch, because the deficit is just too large,” he said. “So Chinese pork prices have just exploded.”
The Chinese hog herd is never going to make it back to its old size, he said. China will change to more modern production methods.
“They will build biosecure facilities and they’ll get more pigs per litter and more poundage per pig than they did before,” he said.
He forecast that demand for soybeans would continue to soften.
“AgRresource is forecasting that China will take about 80 million tonnes of soybeans next year,” he said. “The USDA is at 85 million tonnes. We think their number is too high, but it was supposed to be 107 million tonnes this year.”