Global Grain Asia
More than 350 people attended the conference at the Ritz-Carlton Millenia in Singapore.
Photo by Michael King.
Speakers at Global Grain Asia 2017, hosted in March at the Ritz-Carlton Millenia Singapore, told delegates the grains demand outlook, particularly in emerging markets, was changing rapidly, while the geopolitical and trading architecture that has successfully enabled global trade in grains was now more uncertain than at any time since World War II.

Emily French, managing director of ConsiliAgra and moderator throughout the two-day conference, opened proceedings by pointing out how different the world was in March 2017 compared to a year earlier. She said the 2016 iteration of the event had been best summarized by a Charles Bukowski quote: “The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence.”

She said that in early 2016 Donald Trump had merely been “the poster boy for ‘stupid.’” Now Trump is U.S. president and threatening a broad range of trade institutions with his administration’s protectionist leanings. French said the outlook for 2017 was probably best characterized by a quote from former heavyweight boxing champion Mike Tyson: “Everybody has a plan until they get punched in the mouth.”

Last year was a year of volatility, but could it have been the calm before the storm? French noted isolationism was increasing around the world, most notably apparent in the U.S. presidential and the U.K.’s Brexit elections. With European elections looming, it was clear “some countries are reverting to isolationism policies” and that trade tensions between the United States and China were growing, she said.

By withdrawing from the Trans-Pacific Partnership (TPP) trade deal, French said the United States had effectively “given up its seat” in the world’s most dynamic markets — the Southern Silk Route of south-south trade, which links Asia’s fast-growing economies to the Middle East, Africa and South America.

“The southern Silk routes are the most obvious demand routes for generations to come as new economies such as China invest overseas to secure raw material supply,” she said.

Geopolitical risk

Rabobank Asia_Michael Every
Michael Every, head of financial markets research for the Asia Pacific region at Rabobank.

In one of the standout presentations of the conference, Michael Every, head of financial markets research for the Asia Pacific region at Rabobank, picked up French’s geopolitical baton. He told delegates that the trading world they currently depended upon soon may be transformed as the post-World War II trading architecture — built on U.S. support of global institutions and given liquidity by the wide-availability of the greenback — soon may be replaced by 19th Century mercantilism, a zero-sum game of economic interaction that would have huge implications for global trade and grain flows.

Every said President Trump should be taken at his word when he insisted he would look at the U.S. economy as a businessman rather than as a politician. This would mean the United States should sell more than it buys rather than continue to run huge trade deficits to support the existing global geopolitical and trading system.

He also noted that many of Trump’s team were economic nationalists and thought like mercantilists. He quoted Peter Navarro, Trump’s economic advisor, who said Trump’s trade aim was “unwinding and repatriating international supply chains on which many U.S. multinational companies rely, taking aim at one of the pillars of the modern global economy,”

The United States’ withdrawal from the TPP trade may just be the start of more protectionist policies, he added, highlighting the potential implications of the proposed Border Adjustment Tax (BAT), which would tax imports to the United States and incentivize outbound trade, and the aggressive anti-China rhetoric coming from key administration figures that may spark a trade war.

The consequences of this protectionist approach for global trade stakeholders could be immense, according to Every. A U.S. withdrawal from the international trading system in a bid to use its economic heft to negotiate more favorable bilateral trade deals would create a financial black hole.

Every said the post-World War II trade rules and institutions that underpinned them had created a trading environment that was not zero-sum, with U.S. dollars easily made available for exporters worldwide due to U.S. trade deficits. If the United States pursued economic nationalism and the greenback ceased providing liquidity to global trade, this would leave a vacuum and “rewrite the global economic map forever.”

He said China’s Remnimbi was the only other viable currency to replace the U.S. dollar as the central currency of trade, but China was unlikely to be willing to run the sorts of deficits that would make its currency widely available. He said changes in U.S. policy were therefore likely to breed more protectionism, the creation of more “mini-Trumps” and the escalation of rivalry between the United States and China. These trends would result in growing economic and, potentially, military conflict with a return to neo-mercantilism based on regional trade blocs.

Hammering home his point, Every quoted Alibaba founder Jack Ma, who recently said the world needed globalization and trade because the alternative was so awful.

“Everybody is concerned about trade wars,” Ma said. “If trade stops, war starts.”

Every insisted the current rules of international trade on which the grains industry relied were at risk if his worst-case scenario unfolded.

“It behooves all of us to keep an eye on what potential fault-lines might emerge in the global economy,” he told World Grain on the sidelines of the conference. “Brexit is by far the clearest example of this, but the U.S.-Mexico stand-off is another.

“For the grains industry, there is the additional factor of supply, which is quite fixed, and demand that is equally inflexible given we need to eat. However, that may mean some significant reshuffling of who sells what to whom, where, and at what price. Supply chains could be very significantly impacted in some potential scenarios.”

A number of traders interviewed by World Grain at the event said Every’s presentation was a wake-up call.

“It really puts into perspective what’s at stake and how serious the current situation is,” one said.

Another added: “It’s easy to laugh at Trump’s tweets, but Every was terrifying. Where would that leave us all if regional trading blocs rise up but there is no common currency available for trading?”

However, Kabra Dhruv, a partner at Mumbai-based Shree Laxmi Trading Corp., said the threat of rising protectionism in the United States is not currently a major risk for grain buyers in Asia.

“Most Asian buyers of pulses, for example, especially in Southeast Asia, look to the Black Sea and Australia before the U.S., which is a relatively minor supplier,” he said. “If there are less grains coming out of the U.S. or prices rise due to changes in the geopolitical landscape or on tariffs, then I would expect it would be U.S. exporters that would lose out. Asian buyers would just source more commodities from alternative sources such as Canada.”

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Exportable grain sitting idle

Global Grain Asia
Delegates enjoy a networking opportunities during a break in the proceedings at the Global Grain Asia Conference.
Photos by Michael King.
Moving away from geopolitics, French argued that grains markets were characterized at present by too much exportable surplus chasing too little demand.

“The world is becoming more efficient and is able to live with lower stocks,” she added.

She said the United States remained the world’s wheat and corn storage tank, providing an ideal backstop for buyers of both grains. Global feed demand would be the likely demand driver of both markets, with food consumption demand for wheat sluggish, and the boom for biofuels now “done and dusted.”

This is occurring despite the huge growth in the global middle class, especially in Asia where consumers were becoming more particular.

“Only 11 years ago emerging economies accounted for 10% of world economic activity; now it’s 42% and counting,” said French, adding that while calorie consumption was growing with disposable income, food quality and demand are on the rise.

Joyce Gan, general manager, Group Commodity Procurement, Interflour Holdings, said countries in Southeast Asia alone imported 24 million to 25 million tonnes of wheat last year as consumers moved away from rice-based diets and favored noodles.

“We believe Australian wheat will continue to be competitive into Southeast Asia because it has a freight advantage and quality advantage,” she said. But, she added, fast demand growth would see more arriving from elsewhere, especially the Black Sea.

“I’m sick of being beaten up by the Black Sea stick (on pricing), but the stick hasn’t been hitting us as much this year,” countered Brett Donoghue, director of Australian grain trading company Agracom.

Gavin Bignell, general manager, operations, CBH Group, said the Australian wheat market had changed a lot since deregulation and the emphasis had now moved to boosting supply chain capacity.

“What keeps me awake is loading vessels at the right time,” he added.

Turning to the Canadian market, Fraser Gilbert, senior strategic business development for agricultural services at SGS Group, said almost 50% of Canada’s grain exports now went to Asia.

“The engine that’s driving Canadian agriculture is Asia,” he added. As a result, Canadian west coast elevator and hinterland capacity was being expanded and elevator capacity would rise from 26.8 million tonnes in 2015 to 31.4 million tonnes this year.

After becoming the world’s largest wheat exporter in 2016 with some 25 million tonnes of exports, according to the country’s Export Center, Siavosh Arasteh, managing director of AgFlow, argued that Russian exports now set global wheat FOB prices and should be monitored by all.

“Russian wheat has become the global benchmark,” he said. “Understanding the quality of the crop is essential. Volumes have gone up and it has taken on market share from traditional origins all across the world. So no matter where you buy your wheat from, you should keep an eye on Russia, because you will be affected by it one way or another.”

Luke Mason, head of grains in Asia at Concordia Agri Trading, said from a trading perspective China was currently the market of most interest.

“We also like safe and large markets like Japan and Korea, but Indonesia is interesting,” Mason said. “It’s always growing and will probably import around 12 million tonnes of wheat this year. India is a swing market, and Bangladesh is also importing a lot more grains.”

Weather forecast

Kyle Tapley, senior agricultural meteorologist, MDA Weather Services, said after a record strong El Niño event two years ago, this had been followed by a cold but mild La Niña last year.

“This year the weather cycle is now back in a neutral stage, but El Niño may return in the second half of this year,” he said. “This is most likely in July-September, but it’s not a certainty. We think there is about a 60% chance. A strong El Niño is not expected, so it will probably affect the next southern hemisphere growing season rather than this year’s northern hemisphere season.”

In South America, Tapley said he expected below normal rainfall across Brazil during April and May would stress safrinha corn, which could see slight yield reductions, but no significant harvest delays were expected in Brazil and Argentina.

In North America, he predicted that warm and dry weather during April would favor planting in the Delta and Plains, and predicted generally favorable planting conditions in the Midwest during May.

“The heart of the Corn Belt should see rain close to normal, but yields will probably be down from last year’s records,” he said. “We’re not expecting a major weather problem for corn or soybeans this year.”

In Australia, he said in the next couple of months rainfall would be below normal, which would likely lead to lower yields.

“Drier weather in Ukraine and western Russia from June through August may stress corn,” he added.