The world’s grains markets are in a position that only action by governments, in the form of setaside, can cure, said Dan Basse, president of AgResource Company, during a speech at the Cereals Europe Conference in April in Geneva, Switzerland. Production growth is outstripping demand growth as population shrinks and ages in much of the Northern Hemisphere.

“Somewhere along the line governments have to get involved,” he said. “We still have this overproduction which we all remember going back to the 1960s and 1970s. We believe we are in this constant world of oversupply, unless there is Mother Nature to take over and give us rallies. Even if there are rallies, they will only last three to six-months because of hemispheric harvests.”

There is still money to be made, he said.

“There are still opportunities to be had. At least at the moment, unlike the bullish years of the past, we don’t have the demand drivers that will take it ever higher. It’s not the story I would like to tell, but we just follow the numbers,” he said.

“Central banks have now poured out $27 trillion over nine years and they haven’t done very much. We have 24% of the world having negative interest rates. We have another 80% of the world that has interest rates near zero or 1%. Never has the world seen this before.”

The U.S. dollar still remains in a bullish phase, he said.

“We had a big rally last year. We are now going sideways, maybe a little lower, but we don’t see enough of a dollar decline to cause a sizeable seeding shift either in the Black Sea or South America,” he said.

Basse highlighted the effects of changing technology in agriculture with new seeds, chemicals and fungicides coming on to the market.

“All of this is adding up to what we believe will be more crop in the years to come,” he said. “South America is becoming an export powerhouse. When we look at the United States, I believe it will become what we call the residual holder of grain. The U.S. will be the one left holding all the grain. The farmer will be, of course, the one who suffers in the United States the most under this new environment.

“We believe also that the Black Sea and Europe dominates world wheat trade for the years ahead. Chicago is of diminished importance. You all set the price in the Black Sea and in Europe in terms of what wheat prices will be. Chicago is a fund playhouse. I wake up every morning trying to figure if I’m missing something. Has something changed in the world when it is more bullish? Remember I am a farmer. Farmers wake up bullish. By noon I am not so bullish unfortunately.

“If we look at where we think prices are headed this year, we have got wheat falling in the Black Sea and Europe to $150 to $155, corn to $130, $135, soybeans to $300-$350 a tonne.”

World plantings of grain have been rising, he said.

“We are looking for world seeding to rise by about 5.8 million hectares, the sixth consecutive record that we have seen in global grain seeding,” he said. “A lot of that comes in places like Latin America and the Black Sea. Not so much in Europe. Not so much in the United States.

“We talk about the old saying that there is no cure for low prices like low prices. Unfortunately that doesn’t work any more, because prices are low for everybody.”

Prices look much better from a Russian farmer’s point of view.

“Because if you are pricing wheat in rubles, it is much better than the United States farmer who is pricing it in dollars,” he said. “So even though wheat prices are cheap, I can’t get my friends in Russia to cut back. We need somehow to balance things out.”

At the same time, global grain stocks are estimated at a record. “The last time we built stocks this quickly and this large we lasted for 12 years, 1972 to 1986, before we all got embroiled in that pesky trade dispute,” he said. “Europe was subsidizing exports. The United States created a program called the Export Enhancement Program. We kind of had a trade war to get rid of grains and then we all started finally to agree to set aside acres which led into the next bullish market phase.”

Basse said to get out of this current cycle of supply overrun, governments need to get involved again, he said.

“We need to have the United States, the Russians, the Europeans talk about setting aside some land. Otherwise I just keep running supplies above the 1.8% more grain I need each year for caloric intake increases and we cannot balance.”

The wheat market has become sideways, he said.

“We are producing larger crops and we have not seen a commensurate increase in trade,” he said. “You cannot have a bull market without demand. Think about countries like the United States and Canada and that we have Canada exporting more wheat than the United States.

“When we look at countries like Egypt, which is the world’s largest wheat importer, notice you can see their wheat imports keep plateauing and turning down. Whether they are doing a better job of not feeding the rats or not having corruption is up for you to decide. The big point we have in the markets is the wheat trade in Egypt is not expanding as fast as we would like to see.”

He said in world corn trade, essentially the only one place seeing an increase in demand is in Southeast Asia.

“The problem we have in the grain markets is not only one of oversupply, but one of stagnant demand, demand that just isn’t growing fast enough. The last 10 years were all about expanding demand due to biofuels and the rising caloric intake in Southeast Asia,” he said. “Biofuels is now mature. So I am left with caloric intake rising but it is not rising fast enough relative to supply.”

He looked at the change in population in Japan, Russia and Europe.

“It is hard to have strong economies when you are losing population,” he said. “If you look at those three countries you are losing about 100 million people by 2040. The growth has got to come in countries like India, China and then it gets rather shaky here. I am not sure about Pakistan, Bangladesh, Nigeria and, of course, the U.S.”

A lot of the U.S.’s growth is through immigration, he said. “If new President Donald Trump builds his famous wall across Mexico, I’m not sure that will happen.

“Aging is becoming even more problematic because as we age we consume less calories,” he said. “On top of all this, there is this stack of world debt. It is this debt combined with age and demographics which is the financial markets’ and the stock markets’ indigestion.”

Argentina's Tax Cuts

Argentina’s change in tax regime, taking away export taxes from most grains, with those on soybeans being phased out, has made a big difference to that country’s farmers and will make a big difference to the world’s grain market, Basse said.

“Could you imagine working and all of a sudden not having to pay a tax, what that would it mean for your income?” he said. “When you look at something like sunseed, look at the world price and getting rid of the tax. It means an extra $319 per hectare for that Argentinean farmer. That is a really big deal. Or in the case of wheat, it’s $140, or corn, it’s $284. For soybeans it’s only $50 because the tax goes down 5% a year over the next seven years. This is a big incentive for our friends in Argentina.

“We believe that Argentinean farmers will react like any other farmer in the world and produce more crop,” he said. “If you have been to Argentina and seen the pampas, there is lots of pasture that could be plowed up. This is just the change in taxes. We are not including the peso. That in itself would add another $200 to that equation. So if you’re an Argentinean farmer you just went to heaven.”

Basse believes Argentineans can easily export 9 million tonnes a month.

“The logistics are there. These guys are going to be a powerhouse. We need to pay attention,” he said.

China GDP Slowing

The Chinese economy is starting to slow down, he said.

“Maybe more importantly the Chinese have built up all of this excess debt. People are trying to get their money out of China because of slowing economies and their fear that the only way the Chinese can stimulate any more is through a weaker currency.”

The Chinese have decided to let the price of their corn follow the world market, he said.

“Chinese grain stocks are record large. The USDA has them somewhere in the vicinity of 200 million tonnes,” he said. “We believe the USDA is understating the corn stocks in China by a large degree. The last time Chinese corn stocks peaked in 1999 it took roughly six years of China exporting corn for them to balance things out.

“Can China export corn today? They would have a WTO complaint against them very quickly. Under WTO rules, which they entered into in 2001, China cannot subsidize the export of corn.”

China was the world’s largest importer of grain in 2014-15, taking 31 million tonnes. According to Basse, most traders expect that number to fall to 10 million tonnes.

“Where is that extra 20 million tonnes of grain going?” he said.