China’s demand for feed grains and protein are growing as it rebuilds its hog herd after African swine fever, moving to more modern, biosecure systems that mean greater demand for feed grains and soy. The change is the main driver behind what is set to be a multi-year bull market, with the United States becoming more important, delegates at the virtual Paris Grain Day on Jan. 27-28 were told.
“I have never seen, in my 42-year career, such a change from a supply bear to a demand bull, a lot of that due to the United States,” said Dan Basse, president of AgResource.
“This is really the United States’ time to shine,” he said, noting that soybeans stocks in the United States “were the lowest we could find on record for soybeans for the month of January.”
“We see this as a multi-year bull market,” he said. “As we look at the US export share, the corn is rising, not so much on wheat but that may happen as we start to see the US wheat campaign kick into a higher gear at the end of the crop year.”
At this point, it looks like China will adhere to its plan to buy $43.5 billion of US goods in 2021, he said, referring to the phase one trade agreement.
“The United States and China will then negotiate a new agreement, hopefully early next year,” he said. “We are seeing the influence of (Joe) Biden, the new president of the United States.”
Basse expected a focus on greener policies, with US ethanol demand declining.
“Carbon is going to be a very important ingredient in the 2023 farm bill,” he said. “US farmers will be paid to plant crops and really do things with carbon that make a difference. US influence in the grain trade is now growing again. We see the United States as being one of the dominant figures in world trade. We need big crops in the year ahead. Without that, we are going to see even higher prices. The world needs to bring in about 9 million or 10 million additional acres as we think forward to meet the challenge of Chinese demand for corn. China needs to import annually, we think, 25 million to 35 million tonnes. This will be the significant demand driver that the markets have been waiting for in the year ahead.”
The US corn market is the most competitively priced all the way into next June, he said.
“Look at the strong rally in world fob prices in the soybean market,” he said. “This is a dynamic trend that is likely to persist. AgResource is not seeing any demand rationing that would end this bull market.”
Basse also drew delegates’ attention to the growth in the supply of money.
“The central bank in the United States just flooded the market with liquidity,” he said. “We do believe that there will be inflationary trends as we look at the last half of the 2021 calendar year. It is pressuring the US dollar. The dollar is now down about 12% off the high. This is a trend we think will continue throughout much of 2021.”
That would bring more money into the commodity markets, looking for investment opportunities.
US corn, soybeans and wheat exports will reach records, Basse said.
“In terms of world trade, they will be making it up toward 32% and 33%,” he said. “This is why I say the United States is becoming more important in terms of trade and exports in the years to come. Because of the demand both domestically and for export, along with some crop failures in the United States, with a flash drought late last summer, we are seeing stockpiles of corn, soybeans and wheat falling to their lowest level in the last seven years. This is why the United States is a leader in terms of upside potential pricing.”
He said China this year will probably import close to 37 million tonnes (of feed grains).
“That includes about 17 million tonnes of corn, as itemized by the USDA,” Basse said. “This number may be too low, however, and I would not be surprised that by the end of the year we see China importing a record amount of feed grains. One of the key demand drivers that emerged late last year was China’s revitalization of their hog industry. These are hogs that are now being produced in biosecure facilities.”
He described the new farms as “hog hotels” and explained that they require more maize and soymeal than the old-style facilities they have replaced.
“For some period of time, the Chinese farmer has been making between $250 and $450 per head,” he said. “That is a huge incentive for China to rebuild the hog herd.”
Meat production in China dropped sharply, 11.3%, because of African swine fever. However, animal feed consumption only fell 3.7%, he said.
China’s corn stocks depleted
Rosa Wang, grain market analyst for consultants JCI, explained that China’s corn imports surged in 2020, after the country’s temporary reserve stocks had been depleted. Corn area fell for four consecutive years.
“Production has decreased by 30 million tonnes from the peak level while at the same time industrial processing capacity has increased by 40 million tonnes in the recent four to five years, which quickened the pace of corn destocking,” she said. “The surge of China’s corn imports in the year 2020 is also closely related to China’s trade agreement with the US, known as the Sino-US Phase 1 trade deal. Due to the deal, China will need to make large purchases of US farm produce. Corn is one of the important things. As for the year 2021, we estimated that China’s corn import figure could surge to over 10 million tonnes.”
China has adopted many ways to improve domestic consumption while at the same time actively importing grains from other countries, she said.
The country plans efforts to increase corn area in 2021.
“The current corn yield in China is only 60% of that of the US and 75% of that of Argentina,” she said. “China has great potential to increase its corn yield.”
One way to do that is the commercialization of GM crops.
“China has a great potential of corn yield improvement, which could be achieved from commercialization of GM crops,” she said. “In two years … the commercialization of GM outcrops could start in China.”
Wang estimated that the use of GM crops could increase Chinese corn output by 20 million to 40 million tonnes. It also is expanding imports of other products, such as meat.
“In the first 11 months of 2020, China imported over 8 million tonnes of meat products, which equals 25 million tonnes of corn,” she said. “Import of energy products such as fuel ethanol could also be viewed as importing corn.”
China has no problem of wheat supply shortage, she said, but explained that it does lack high quality.
“China is short of the high gluten and lower gluten wheat,” she said.
In 2017, production of high-quality wheat in the main producing areas, Shandong, Henan and Hebei, was just 5 million tonnes. China is making efforts to increase its self-sufficiency in these types of wheat.
Low energy prices impacting Russia
Sabina Sodikova, country manager for Agrozan Commodities DMCC in Russia, said the country was “influenced too much by oil and gas prices.”
“When oil and gas prices are decreasing, the government has to reduce the ruble level just to have more budget,” she said, also pointing out that COVID-19 had had a significant adverse effect on the wider economy, but particularly on logistics. “When world wheat prices have continuously being going up, farmers have very good financial stability.”
In particular, they were able to increase storage capacity.
“Support from the government allows them to build warehouse structure and store the commodities,” she said.
That gives them the ability to hold onto grain while they wait for price increases. This, in turn, creates problems for exporters.
Sodikova described the rise of the VTB Group as the major player in grain logistics. The company now owns, for example, 80% of Russia’s grain-carrying rail vehicles.
“This (is) all giving them more flexibility in the pricing where they can play a little bit higher than at the adjustments in the market,” Sodikova said.
Chris Lyddon is World Grain’s European correspondent. He may be contacted at: firstname.lastname@example.org.