Photo by Chris Lyddon.
Jan Lambregts, global head of financial markets research at Rabobank, set the scene for the global economy.
“The Fed wants to normalize rates. China wants to have growth. ECB and Japan would love to see inflation. All of which are struggling and all of which there are risks associated with. When you’re at the bottom of the abyss it’s very easy to keep being pessimistic, but of course there can be a way up. The key way up would be structural wage increases, probably starting in the U.S., but globally being rolled out.”
A panel of senior traders looked at the strategic outlook for grains and oilseeds trading powerhouses.
“We believe there’s always a role for a good supply chain manager,” said Daan Vriens, CEO of BayWa Agri Supply and Trade, in response to a question from moderator Karel Valken, the global head of trade and commodity finance Agri at Rabobank, about whether trading companies need to be big. “There’s also a cost of complexity.”
“Being global adds complexity,” said David Ohayon, senior head of grains and value chain platforms for Louis Dreyfus Co. “We’re in a new cycle where we have to go back to basics.”
Stefano Rettore, president of CHS International, said his company had to be close to its U.S. farmer suppliers.
“Ten to 15 years ago, we had much less price transparency,” he said. “The price flows were much less complicated. The mindset needs to be not how I’ve done it for the last 15 years, it’s how am I going to do it for the next 15 years.”
He stressed that it is not only price that drives margins.
“The farmer is having higher input costs and higher land costs,” he said.
“Our industry has been spoiled,” said Vriens, suggesting that the trading business has had too high a living standard. “The trading margin has gone and we’re back to reality. The reality is we’re a commodity, low-value business. The old way of fundamental trading — ‘my fundamentals are right, I’ll just sit it out’ — has changed.”
Rettore said, “We don’t know where our margins are going to be tomorrow. They may be in the U.S. They may be in the Black Sea. You need to be globally present.”
Black Sea outlook
Photo by Chris Lyddon.
“Russia has good wheat,” said Oleg Kryukovskiy, head of trading, GTCS Trading DMCC. “It is just a question of what quality customers need.”
Swithun Still, director of Solaris Commodities SA, responded to concerns about sprouting in this year’s Russian wheat harvest.
“It is an issue for many buyers,” he said. “We can’t send feed wheat with sprouted grains to a lot of destinations. Russian farmers like to plant wheat. You might see some more corn planted in Russia. The yield on corn in Russia is significantly higher than wheat. Russian corn was not an export item at all even four years ago.”
Dmytro Furda, a trader with Nibulon SA, said that sunflower seeds have become the most attractive crop for farmers in Ukraine to produce.
“The lack of trade finance is the biggest obstacle to developing yield,” he said.
While Furda complained about the age of rail vehicles in Ukraine, Still explained that the high fobbing cost in Russia formed an incentive to invest in storage in ports.
“There is the appetite to build more infrastructure,” he said.
Bleak shipping situation
A panel of shipping experts gave a depressing view of their market.
“Only half the ships planned for 2016 were delivered,” said moderator Voytek Chelkowski, managing director for Seamind Pte Ltd. “We’ve seen about 37 million tonnes of ships delivered versus 25 million scrapped.”
The market has risen, albeit from a low level.
“The BDI (Baltic Dry Index) has tripled since early this year,” said Thomas Lisowski of Seamind. “Current levels are at an average of less than 10% of the highs of 2007-08.”
Giacomo De Ferrari, commercial director at United Bulk Carriers International, expressed concern over new legislation. One example is tighter proposed rules on ballast water.
“It is very costly to install a ballast water washing system in your vessel,” he said.
The other is about improving fuel quality.
“Refineries don’t really like to produce fuel oil for ships,” he said. “I am sure it’s going to cost more. The bill for the few will be much higher.”
He hoped that the two legislative changes would mean that more vessels are going to be scrapped.
“Scrapping is the only medicine,” he said.
However, the experts agreed that a recovery could trigger more shipbuilding, killing off that recovery.
Plenty of grain in Europe
Photo by Chris Lyddon.
“It’s all about the balance sheet,” Butler said. “On the supply side we’re in the land of plenty. Margins have been squeezed. There’s a refocus on the core business in each actor in the chain.”
Lepy added, “We are seeing more and more of a trend of our wheat being used as a feed grain. This is worrying for me with a producer background, because the value is less than the food value.”
Meanwhile, de Wilde pointed out that last year there was a record amount of wheat in the E.U.
“The cost of production of the farmer is a lot lower in the Black Sea than in the E.U.,” he said.
Lepy said E.U. agriculture needed to become more competitive.
“Farms will be much larger than they are today,” he said. “To be competitive you need to be massive, you need to be efficient. What you are doing at the farm level is trying to diversify your income stream. CAP rules and regulations will continue to revolt, to have more control, to be more sustainable. Some people will see it as a burden. Others will see it as an opportunity.
“The set of low prices that have been seen the last three years is going to set a process of concentration. We will see a revolution in farming, a revolution driven by big data.”
China and India impact
Bell Chen, senior vice-president of Asian Markets, RJ O’Brien, looked at the implications of Chinese stockpiling policy.
He started with policy changes for maize, which include levies on DDGS.
“That probably killed DDGS imports into China,” he said. “China needs time to reduce our farming population.”
Ethanol production is affected by uncertainty.
“We do not see the industry expanding aggressively,” he said.
David Hightower of the Hightower Report ended the conference with a look at India.
“It is a sleeping giant,” he said. “It doesn’t get the attention that China receives. Growth is 3% to 5% above most other economies. It’s usually competitive with China. They see everything, in economic terms, as a battle.”
He saw problems with consumer attitudes.
“India has a very strong GMO concern that may slow its ability to produce enough food for its people to eat,” he said. “The wheat market is where India hits the markets. The prosperity of the Indian consumer is going to make the sugar market very volatile.”
India is using a higher proportion of its land for farming than many other countries.
“It has 50% of its land used already,” Hightower said.
A stronger currency is making India better able to pay for imports.
“If corruption and inefficiency in the economy continue to fall, you are going to see more and more money pouring into the rupee,” he said. “India has a problem that all of its investments are tied up in non-stimulating instruments.”
That means things like gold and hoarded cash, one reason why the government has just withdrawn large denomination notes.
“They want to pull out that wealth,” he said. “India is in the midst of a huge transformation. Don’t underestimate it.”
