China is going to be the dominant driver in the grains market in the coming years, delegates to the recent Black Sea Grain Conference, organized by Kiev, Ukraine-based sector experts UkrAgroConsult, were told. With the European Union (EU) putting in place policies that are likely to cut grain production, Ukraine, with a sector that is building on long-term investments in farming to increase its output, is well positioned to take advantage.
Taras Kachka, Ukraine’s deputy minister of Economic Development, Trade and Agriculture and the country’s trade representative, explained during the conference that Ukraine’s market and government had found a good balance, with the government not interfering unless necessary.
“The grain market, the grain industry in the Ukraine is a prerequisite of the wealth and development of Ukraine’s economy,” he said.
Vladislava Magaletska, head of the State Service of Ukraine for Food Safety and Consumer Protection, speaking from Brussels, Belgium, where she was visiting EU institutions with Kachka, described Ukraine as “one of the global leaders for export of grains.”
“Analysts predict that within the next 10 years Ukraine will continue its improvement of its position in the global market of grain and will become one of the world’s top five exporters of grain, increasing its share by 15%,” she said.
She put Ukraine’s total grains exports in 2020 at over 54.3 million tonnes, including 17.9 million of wheat, about 4.8 million of barley and 27.3 million of maize. The main export markets were China, the EU, Indonesia, Turkey, Iran, Tunisia, South Korea and Bangladesh.
“There are potential changes,” she said, highlighting for potential growth in exports to China.
The COVID-19 pandemic had an adverse effect on exports, she noted.
“However, since the beginning of 2021, with phytosanitary certificates Ukraine has exported 14.4 million tonnes of grain and oilseeds, 3 million tonnes of wheat, about 300,000 tonnes of barley and 11 million tonnes of corn,” she said.
Ukraine grain sector transformed
Sergey Feofilov, director general of UkrAgroConsult, explained that Ukraine’s grain sector has completed its transformation from a labor-intensive model to a capital-intensive model.
“A harvest of grain on the level of 65 million or 70 million tonnes, that is the result of substantial investment (from) 2013 to 2017,” he said. “Technologies play a bigger role. They can reduce the influence of such factors as the weather and climate change.”
He was concerned, however, about a sharp fall in investment in 2020, something he described as a global trend, with investment flowing from agriculture into the financial sector, including securities.
“Profitability is greater (and the) risks are very low,” he said.
That left farmers’ incomes as the main source of investment in agriculture. Higher prices meant optimism that farmers would be able to resume investment in new technology.
“We agree with the USDA, the growth of yield and exports will take place both in Ukraine and in Russia,” he said, also noting increased Chinese demand for maize, despite China’s plans to replace the crop with other feed ingredients.
Feofilov expected Ukrainian grain production to recover, with new records possible.
He also highlighted food price inflation, which he said was a direct consequence of the pandemic.
“Consumers globally have accumulated big volumes of unused money,” he said. “Such deferred consumption is set at $3 trillion to $4 trillion. That is globally.”
He noted that in 2020 Brazil’s poultry prices rose by14%.
“That trend has prevailed in February and the growth was 6%,” he said. “To overcome inflation, we need to achieve a balance between supply and demand.”
Economic crisis impacts commodities
Philippe Chalmin, president of the French commodity research institute Cyclope, told conference delegates that “we are still in the midst of what can be called the worst economic crisis since the 1930s,” with the world running at almost -10% growth.
“The crisis has really profited China,” he said. “China got out from the crisis as early as mid-2020.”
Large-scale spending has helped the United States to recover as well, but Europe was still in crisis. Low interest rates and a world “awash with cash,” meant that many investors were looking for new types of assets and turning to commodities. Prices were running higher, although he hesitated to apply the label “super cycle.”
“You can’t say that there is a real super cycle, but for many, many commodities we are with prices that are almost at record-high levels,” Chalmin said.
He gave examples of other commodities where the market has turned higher, such as non-ferrous metals, which have recovered from lows in March 2020.
“This is Chinese consumption first and the fact that everybody is looking at an energy transition that will use less oil, with more electric cars,” he said. “When you think of electricity, it uses copper.”
He also pointed to increases in the price of steel in China as well as lumber.
“In the United States, 80% of the houses are made of wood,” he explained. “Prices for lumber have been multiplied by four because there is a boom in the building industry.
“This is the explanation we find for many commodities. We have a boom in demand and for the moment the supply chain is still confronted with problems, problems of production and, of course, also problems of logistics.”
Prices are high for grains and oilseeds, but also for animal products and sugar. He noted rising wheat prices but added that “the most exciting things have been happening, as you know, on corn.”
“The rise is pretty impressive,” he said. “For some time, we had that extraordinary situation of corn prices being higher than wheat prices, with some times, by the way, milling wheat being used for animal feed.”
The story was the same for soybeans, despite good production prospects for Brazil. Palm oil was also up, despite production problems in Malaysia linked to the pandemic.
“Many laborers working in palm oil estates in Malaysia come from Bangladesh and couldn’t go back to the country because of the limits to travel,” he explained.
Chalmin said China now is the biggest influencer of the market.
He had forecast that China would import 50 million tonnes of grain in 2021, harking back to when the imports of the former Soviet Union were at that level.
“For the decade during the 1980s, the USSR was the real master of the world grain market,” he said.
China’s pork production is being rebuilt after African swine fever on more modern lines.
“The small pig producer in the farm backyard is probably an image of the past,” he said. “That means that they will be more and more dependent not only on proteins, such as soybeans, but also on cereals.”
Chalmin looked at the situation in the European Union, currently negotiating a reformed version of its Common Agricultural Policy. He explained that the European Parliament, the European Commission (the Union’s civil service) and the Council of Ministers of its Member States must agree to the deal.
“You have to build a common position out of those three institutions, which are constituted by 27 countries,” he said. “I was thinking that things could get slightly easier once the British were out of Europe. Unfortunately, this is not the case.”
The EU aims to make its farm policies greener, cutting the use of agricultural chemicals and increasing the area designated for organic farming to 25% of the total.
The USDA, he explained, has worked out that the EU’s plans would cut grain production by 49%. The changes would take Europe, more and more, out of world grain markets.
“What is clear is that Europe is looking the other way,” he said. “This is good news, I think, for you. The Black Sea will be more than ever the grain basket of the world.”
China growth continues
James Zhou, chief commercial officer and head, Louis Dreyfus, Asia Region, focused on China, describing changes in its population as offering “opportunities as well as challenges.”
Referring to the most recent census, he said the total population base probably was bigger than many people were expecting.
“It is above 1.41 billion,” he added, explaining as well that the urbanization rate, as people move from the countryside to cities, was set to reach 70% by 2030. “China is starting to become an aging society earlier than people were forecasting,” he also noted.
GDP growth has been slowing, but he explained that China has been recovering very well from the economic effects of the pandemic.
“The income growth, especially the real disposable income growth for individuals, will continue to grow,” he said.
Turning to consumption of agricultural products, he said: “This is still a growth story. The main growth will come from corn. The oilseeds, the vegetable oil growth forecast is more modest.”
Animal protein consumption growth is set to continue, he said, but beyond 2030 the pace will continue to slow down and most likely will be flat after that.