Weekly Commentary Archives | Grain Brokers Australia

Russian export taxes a bonanza for Australian farmers…

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Taxes on the export of Russian wheat came into effect last week in conjunction with an export quota, and this will be followed in March by taxes on corn and barley exports.

In December last year, Moscow announced restrictions on the export of grain in an effort to curb food inflation. Firstly, an export quota to limit exports of wheat, barley, corn and rye to 17.5 million metric tonnes (MMT) between February 15 and June 30 this year. And secondly, an export tax on wheat of €25 (AU$41.50) per metric tonne in effect for the same period.

Last month, the Russian government doubled the tax on wheat to €50 (AU$83) per metric tonne effective from March 1. At the same time, they announced an export tax on corn and barley would be set at €25 (AU$41.50) per metric tonne and €10 (AU$16.60) per metric tonne, respectively from March 15 to June 30.

As if that wasn’t enough government intervention, early this month, Moscow announced that the fixed taxes would be replaced by a floating tax from June 2, a month earlier than the market had expected, and it will remain in place indefinitely. This move is likely to make Russian wheat prices relatively expensive moving forward.

This variable export levy will be imposed on wheat, corn and barley, and will require sellers to register their export contracts on the Moscow Exchange from April 1. The government will then calculate market benchmarks for each commodity based on the export selling prices, and these will be used to establish the tax value.

Under this system, the floating tax will be triggered if the market benchmark price exceeds the government’s base export price thresholds. The difference in value between the market benchmark price and the base export price will attract a tax of 70%. The government has set the base export price indicators at US$200 for wheat and US$185 for both barley and corn.

Now it seems the Russian government has taken a leaf out of Trump’s book on free-market economics. Just like the US collected taxes on Chinese imports and distributed the proceeds to the US farmer: Moscow and domestic millers have apparently agreed on a few billion roubles of subsidies to help businesses remain viable and combat higher domestic prices.

So, part of the state’s money from the proposed export taxes will be directed into helping domestic consumers pay higher prices for their wheat. A tax intended to curb inflation will, in fact, likely lead to higher inflation: a classic market oxymoron. And I am sure the government intervention will not end there.

The continuation of an export tax into the new crop slot has provided an incentive for the Russian farmer to sell, especially with a market inverse of around US$40 per metric tonne. However, a big question mark remains around new crop production in Russia, and this may be a big enough incentive for the grower to hold for the time being.

According to leading Russian agricultural consultancy, Sovecon, Russia’s 2021 wheat harvest is likely to be considerably lower than last year. It downgraded its 2021 forecast last week by 1.5MMT to 76.2MMT compared to 85.9MMT 2020 harvest. Sovecon said the crop entered winter in the worst shape in a decade after an unseasonably dry autumn, and while January weather was beneficial, February was disappointing.

A significant proportion of Sovecon’s production cut was taken out of spring wheat output. It expects the Russian farmer to vote with their wallet and cut plantings following the introduction of the permanent formula-based export tax. Sovecon cut its spring wheat harvest forecast by 1MMT to 22.6MMT.

Russia is currently the world’s biggest exporter of wheat, accounting for around 20 per cent of global trade. The taxes have already had an impact by helping to lift already inflated global prices and disrupting international tenders. Russia is generally the leading indicator of export prices, but it is effectively out of the market while there is so much uncertainty around the new crop tax regime. The market is confused.

On the positive side, the Russian export restrictions plus smaller wheat crops in both the European Union and Argentina have been a bonanza for the Australian farmer. Russian prices have been pushed to six-year highs, and now the European Union market has finally realised that the global balance sheet is getting tighter.

Global wheat trade in the 2002/21 marketing year is edging higher, and demand remains resilient. Chinese imports continue to outstrip expectations, and importing countries are keen to build inventories. Concerns persist over new crop supply shortages as the coronavirus pandemic enters its second year.

While tensions between Beijing and Canberra persist, China has continued to buy Australian wheat. December exports to China were a record 800,000 metric tonne, almost double the previous mark, and while not as high, January shipments were still quite strong.

Chinese importers were active in the Australian market leading up to Chinese New Year and are rumoured to have purchased upwards of 400,000 metric tonne for March to May shipment and at least 200,000 metric tonne for shipment in the May-June period. And there are expectations that the buying spree will continue post New Year with the possibility that sorghum will be added to the shopping list.

What about barley, I hear you ask? While it is highly unlikely we will be fielding interest from China in the near term, there is little cause for concern. Despite the doom and gloom after Beijing imposed tariffs last year, Australian barley has been finding plenty of export friends, and the shipping pace is well ahead of trade expectations.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

The USDA tried, but it still missed the mark on China…

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The grain market bulls had their horns clipped by the USDA last week when the February global supply and demand update failed to deliver the supportive news many had expected. While there were few production surprises, the WASDE report raised more questions than it answered on the demand and stocks side of the equation.

The USDA increased world production for corn, soybeans and wheat, which was broadly in line with market expectations. However, global demand was lower for corn, which was a surprise considering the China appetite, unchanged for soybeans, and dramatically higher for wheat. All this led to tighter ending stocks for soybeans and wheat, but corn stocks defied expectations by posting an increased closing number.

World corn production was increased slightly to 1,134.05 million metric tonne (MMT). It was unsurprising to see no change in this report to Brazil and Argentina’s forecasts of 109MMT and 47.5MMT respectively. Nonetheless, there are still production concerns around dryness in parts of Argentina and delays to the planting of Brazil’s safrinha crop.

Global corn demand was decreased by 2.54MMT to 1,150.52MMT compared to the January report, the exports forecast was up by 2MMT to 185.7MMT and ending stocks are estimated to increase by 2.7MMT to 286.53MMT.

The corn matrix is all about Middle Kingdom demand at the moment. The USDA has been slow to react, but it finally bit the bullet by adding 6.5MMT to its January forecast. This took corn imports to a record 24MMT, better reflecting Beijing’s recent buying spree.

It would be logical to think that US exports would reflect that same market activity. Wrong! The USDA rearranged the furniture somewhat by decreasing demand in the European Union, South Korea, Japan, Turkey and Saudi Arabia, leading to an increase in US exports of only 1.27MMT. Go figure!

China’s domestic feed consumption of corn was raised by 6MMT, which made total sense. But the USDA reduced corn used for food, seed and industrial purposes by 4MMT. This meant 4.5MMT of the additional imports went to ending stocks which increased month-on-month to 196.18MMT, just 4.35MMT lower than 2019/20 closing stocks.

The USDA avoided the hard decisions by leaving China’s opening stocks and production unchanged. Yet several factors point to much lower inventories. Beijing suspended the country’s ethanol blending target in early 2020, citing low corn stocks. China sold 56.84MMT of corn from state reserves in 15 auctions from May to September last year, but the USDA’s stock estimates have failed to reflect the domestic market activity.

There are also serious question marks around the corn production numbers being posted by the Chinese authorities – and adopted by the USDA – after flooding and severe lodging devastated large tracts of the country’s major corn producing regions last year. And why would China need to import more than three times as much corn in the current marketing year as they did in the 2019/20 season with a stocks-to-use ratio of 68 per cent?

The USDA made very few changes on the soybean front, but the balance sheet is already tight, particularly in the US. Global production was unchanged at 361MMT with Brazil at 133MMT, Argentina at 48MMT and the US at 112.55MMT the major contributors. Collectively they make up 81 per cent of global production emphasising the vulnerability of the global balance sheet to production hiccups in those jurisdictions.

Overall demand was steady at 369.84MMT, and worldwide exports were increased by 0.6MMT to 169.69MMT. Almost all of this increase was out of the US where the forecast ending stocks fell to just 3.25MMT. That has the US running on the smell of an oily rag leading up to their harvest, yet sales and export data suggest US exports should be higher. It is looking increasingly likely the US will require imports from South America to bridge the supply gap.

Worldwide ending stocks were down almost 1MMT to 83.36MMT which equates to a fall of 11.5MMT, or 11 per cent, compared to the 2019/20 season and down a staggering 29.5MMT, or 26 per cent, compared to the 2018/19 season.

China remains the front-page soybean story. Demand in the 2020/21 season is unchanged at 100MMT, or 59 per cent of global exports, but many in the trade believe that it will be higher come season end if the current pace of purchases is maintained. The major export suppliers continue to be the US and Brazil with 61.24MMT and 85MMT forecast to be shipped respectively in the current marketing year. That is more than 86 per cent of total global trade.

The USDA pegged global wheat production at a record 773.44 million metric tonne, an increase of 0.8MMT on its January estimate. It called Kazakhstan wheat production 14.26MMT, up 1.76MMT on last month and 2.81MMT higher than in 2019/20. Pakistan output was down 0.5MMT and the Argentine crop was decreased by 0.3MMT.

Still, the USDA continues to ignore the enormous crop just harvested here in Australia, leaving production unchanged at 30MMT. We know it is all about the end game for the USDA when it comes to Australian estimates, but the bulk of harvest was concluded two months ago, and their number is still 5MMT shy of reality.

The big change in wheat was a 9.8MMT hike in world demand. Indian consumption was up 3.5MMT, but the headline change was, you guessed it, China. The demand for feed grains remains strong, and the country’s feed and residual use was raised by 5MMT to a record 30MMT, eclipsing the previous record of 26MMT set in 2012/13.

Additionally, China’s domestic corn prices continue to run at a premium to wheat, encouraging greater use of wheat over corn for stock feed purposes. Auction volumes of old-crop stocks in China have also increased, expanding feed-quality wheat availability with almost 14MT sold in the first five weeks of 2021.

However, the USDA only increased imports by 1MMT meaning 80 per cent of the increase in feed use was taken out of ending stocks. This brought them down by 4MMT to just under 155MMT. That said, wheat imports at 10MMT are almost double those of last season and more than triple the 2018/19 number.

Last week’s WASDE report confirmed several significant themes. China continues to be the driver on the demand side of the global supply and demand equation. Their appetite is massive, and there are no signs it will abate in the near future. On the production side, all eyes are firmly on South America at the moment where consolidation of current production estimates is critical. Any setbacks could quickly spark another market rally, particularly in corn.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Global container crisis disrupting food supply chain…

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The rapid recovery of the Chinese economy relative to the rest of the world following the coronavirus pandemic has led to a surge in export volumes and a global container market crisis.

China’s containerised exports are far greater than their imports with three containers leaving China for every container arriving. Consequently, empty containers are stranded in the west when they need to be in Asia.

Chinese demand for containers is so high exporters are paying huge premiums for empty boxes. These premiums have climbed to such a level it is now more profitable for carriers to send the boxes back to China with no cargo, rather than waiting to have them refilled with goods destined for Asia.

It is not entirely unusual for containers to travel back to the load port empty after a voyage, especially if container imports greatly exceed exports at the destination. However, it is not usually a profitable exercise and is far more common for shipping lines to backfill the boxes to boost round trip earnings and maximise income.

The cost of sending full containers from China to the United States is currently around ten times higher than the reverse journey. This provides the carriers with a huge incentive to quickly reposition bare boxes back to China, rather than waiting for them to be filled with US exports. It is estimated that 75 per cent of containers moving from the US to Asia at the moment are making the journey unstuffed.

This issue escalated late last year just as US agricultural exports were entering their busiest period. It is estimated that shipping lines rejected almost 178,000 twenty-foot equivalent units (TEU’s) of US agricultural produce, worth hundreds of millions of dollars, in October and November alone. And this was from just four ports: Long Beach and Los Angeles in California and the east coast ports of New York and New Jersey.

Port congestion at the US West Coast ports of Los Angeles and Long Beach is also unprecedented due to high inbound volumes and surging COVID-19 cases amongst dockworkers. This has forced shipping lines to cancel scheduled sailings, not for lack of demand, but because of lack of tonnage as the huge container vessels are stuck at anchorage awaiting berths. And when they do berth the quickest turnaround option is to load out empties.

In December, the spot freight rate for the Asia to North Europe route was 264 per cent higher than December 2019, and for the Asia to West Coast US route the rate was up 145 per cent compared to a year ago. Rates for both the China to Europe and China to US routes have surged more than 300 per cent compared to the market low in March last year with freight now costing around US$6,000 per container.

There are approximately 180 million containers worldwide, and when COVID-19 hit in early 2020, the shipping lines cancelled orders for new boxes for fear of a global recession. The speed and magnitude of the Chinese recovery has caught the industry off guard. It meant that almost all of the carriers needed to add significant container capacity, by offering more services on the busy routes, to address the container shortage challenge.

The container freight issue has been exacerbated by the plunge in international air freight capacity. Airfreight providers usually buy the unutilised capacity in the cargo hold of passenger planes to transport high-value goods. The coronavirus pandemic, and subsequent global travel restrictions, has seen passenger services plummet, adding demand to the containerised sea freight market.

Another contributing factor is that containers generally move back and forth along the same shipping route. The disruptions to international trade caused by COVID-19 now mean that many containers are shipped off to one port and then get stranded as the volume of return trade has decreased. That container may then be packed and loaded out to an exotic location to utilise the asset, making it even more difficult to return it to its regular path.

Food importers around the globe depend on a reliable and efficient worldwide container market. While most market sectors have been affected to some degree, the passage of agricultural commodities has suffered greatly. Grain, oilseeds and other farm produce are piling up at port facilities throughout the western world and across parts of Asia.

Pulses out of Canada, such as lentils and peas, have been stranded at port for weeks waiting for space on regular services to Asia. India’s sugar exports were only 70,000 metric tonne in January, less than 20 per cent of shipments twelve months earlier. Vietnam is battling to find container capacity for their regular coffee and rice exports to the US. And US soybean and cotton exports are being rolled out the curve as they can’t find export slots. The list goes on!

The situation is so dire some importers are switching to buying in bulk, putting upward pressure on bulk freight rates. Some buyers are cancelling contracts as the counterparty has failed to meet terms. Others are deferring purchases to avoid delays and high freight costs. Domestic traders and exporters in many jurisdictions are reluctant to offer, especially in the nearby market, due to the freight market chaos.

The global flow of refrigerated containers is also in turmoil. China’s rigorous customs clearance process is causing lengthy delays at ports and a backlog of imported containers waiting to be cleared. Reportedly, there are so many refrigerated containers piled up in the port of Dalian that it is running out of power plugs to keep them operating.

This has been one of the key reasons behind the recent spike in China’s domestic pork prices. Retail prices have risen to their highest level since September last year, prompting Beijing to boost sales from state reserves ahead of the Chinese New Year holiday.

The story in Australia is no different. Container parks are reportedly full of empties, yet they are not being released unless the intended cargo will reposition the boxes back to China. Timber used to be Australia’s biggest containerised agricultural export commodity to China. When China imposed the timber ban last year, it was expected that the decision would free up containers for other agricultural exports. That simply hasn’t been the case.

Australian grain is extremely competitive into Asia, and beyond, at the moment. Exporters are seeing plenty of Asian demand for containerised farm produce, but exporters and packing facilities are struggling to get boxes. Instead, export slots are being rolled by weeks, even months in some cases, and some of the containers are being sent back to China empty as the shipping lines are being paid handsomely to do so.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Brazilian crop prospects improve but harvest delayed…

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The rains have arrived across much of Brazil’s row cropping regions with the weather pattern now resembling a more typical summer rainy season.  The increased precipitation has come just as the majority of the country’s soybean crop is setting and filling pods, putting Brazilian farmers on track to harvest a record soybean crop, and easing concerns about South American soybean supplies.

A recent poll of thirteen leading market analysts pegged the Brazilian soybean crop at a 132.2MMT, up from the December forecast of 131.8MMT, and eclipsing the previous record of 126MMT produced in 2020. Yields in the top producing state of Mato Grosso are expected to be lower than last year, but an improved outlook in several other states is expected to compensate for the losses. The current USDA forecast is on the high side at 133MMT.

While there are still areas in moisture deficit, the conditions are generally favourable in the central and northern parts of the country for the remaining crop. Some areas have abandoned and replanted to cotton, but any paddocks not sprayed out by now will go through to harvest.

Extremely heavy rain and flooding in the southern states of Parana and Rio Grande do Sul are raising concerns, and there is more rain on the forecast. Some places have received more than 500 millimetres in the last 20 days, and some farmers have made up to five fungicide applications to control disease outbreaks. This will potentially lead to production downgrades and quality issues across an area that produces about a third of the country’s soybean output.

While the recent rains are certainly welcome and will help finish the crop, it further delays the soybean harvest. This season’s crop was planted late in many regions following an extremely dry start to the sowing season and had already delayed the commencement of harvest by around two weeks. The poor planting conditions and staggered germination have also led to varying levels of crop maturity within paddocks making harvest difficult.

Harvest is underway in Mato Grosso, but it is not at full pace as yet. As of late last week, estimates put the state’s harvest progress at just 5 per cent versus 27 per cent at the same time last year. The rain in the south is expected to delay the commencement of harvest in those states by at least two weeks.

With more rain on the forecast, the delays are expected to continue into February, raising concerns over export flows. Local analysts suggest that no more than 5 million metric tonne (MMT) was harvested by the end of January, less than half the stocks available for export at the same time in 2020. And the pace of harvest is not expected to normalise until late February or even early March.

As a result, the vessel line-up to load soybeans out of Brazilian ports has reportedly risen to almost 9MMT. This comes in a season where prices have been so attractive for the Brazilian farmers that they have forward sold around 60 per cent of their soybean crop ahead of harvest, 20 percentage points above the historical average for the period.

Maybe four vessels finished loading and sailed in January versus thirteen in 2020.  Exporters are concerned that the delays will now affect February shipments which typically total 5-6MMT. The sluggish start to harvest, and competing demand from domestic crushers, means that actual February shipments to China may fall short by as much as 2-3MMT. And there is already 1MMT that didn’t get shipped in January that will be pushed into February.

Whilst the demand will probably be recouped at the end of the Brazilian shipping season, the Chinese continue to buy US beans for February and March shipment due to delays. Further interruptions may push another round of bean sales to the US to make up for Brazil’s nearby export shortfall.

This only exacerbates the supply problems facing the US this summer. The bottom line is: the US is in real danger of running out of beans at the current sales pace and in all likelihood, will require imports to bridge the supply gap to their new crop. There is already talk in the trade that imports of Brazilian soybeans for June are getting very close to working at current values. An exciting space to watch!

It wouldn’t be a typical summer crop harvest in Brazil without the threat of a trucker’s strike. Brazil’s truckers’ federation, which has 800,000 members, is still calling for an all-out strike from Monday of this week over the rising cost of diesel. Higher global oil prices, coupled with Brazil’s weakening currency, have driven up local diesel prices. However, the likelihood of it proceeding has decreased as a split emerged last week over the merits of the action.

The late soybean harvest in Brazil becomes a massive issue for global corn supply. Brazil’s safrinha corn crop is planted after the soybeans have been harvested and represents about 75% of its output. With planting delayed by as much as a month, it means that some corn will be planted well outside of the ideal seeding window. This increases production risk as it pushes the crop further into the drier autumn months of April and May, and delays export onset.

One big difference this year is the price being paid to the Brazilian farmer. The weakening currency has pushed prices higher, ensuring the crop gets planted as they can still make a profit even if yields drop significantly due to the later seeding.

Corn has just had the longest run of monthly gains in more than a decade as Brazil’s planting issues, coupled with a Chinese buying spree, have further tightened global supply. Last week alone saw the Chinese purchase around 6MMT of US corn and further sales are anticipated. Delays to the availability of Brazilian corn and political interference to limit exports from Ukraine, and possibly Argentina, pushes even more demand to the US.

Surely February will be the month of reckoning for the USDA who have been well behind the eight ball on both their estimate for total Chinese corn imports (17.5MMT) and total US corn exports for the 2020/21 marketing year. Before last week’s buying binge, the US had already sold 11.8MMT of corn to China with a further 7.9MMT sold to the sister state, conveniently referred to as “unknown”.

The sustained increase in corn values should, and needs, to be rationing global demand, but last week’s market action suggests otherwise. US corn is currently the cheapest feed grain in the world, and the delay to planting in Brazil only extends its supply window by another month. Corn should now become the rally leader, or at least gain on beans, in the fight to ration global demand and buy area in the next northern hemisphere planting program.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

China’s affair with the global grains market continues…

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China’s General Administration of Customs released its December trade data last week, and the numbers confirmed that the Chinese economy continues its post-pandemic rebound as the countries manufacturing industry capitalises on coronavirus lockdowns in many western countries.

Exports grew for the seventh consecutive month in December, rising 18.1 per cent on the same month in 2019 but down slightly from the 21.1 per cent growth recorded in November. Imports grew by 6.5 per cent in December compared to a year earlier, and up from 4.5 per cent the previous month.

The surge in exports in December pushed China’s trade surplus to a record US$78.18 billion, eclipsing the previous high of US$75.40 billion set in November. Overall, China’s exports rose 3.6 per cent in 2020 compared to the previous year, while imports declined 1.1 per cent over the same 12-month period. As a result, China’s trade surplus for the year was a staggering US$535.03 billion, the highest since 2015.

In the agricultural commodity space imports soared to record highs in 2020. This was driven by healthy stockfeed demand from a pig sector recovering quickly from the decimation caused by African Swine Fever (ASF). There was also a domestic shortfall of corn, and there was the Phase 1 trade deal commitment with the United States that helped stimulate the record pace.

China maintained its mantle as the world’s biggest buyer of soybeans, importing a record 100.33 million metric tonnes (MMT) in the 2020 calendar year. Brazil was the biggest supplier with exports to the Middle Kingdom climbing 11.5 per cent year-on-year from 57.67MMT to 64.28MMT. After a huge shipping program in the second and third quarters of 2020, December arrivals fell to just 1.18MMT, down from 4.83MMT a year earlier.

The US is the other major supplier of course, with shipments soaring 52.8 per cent to 25.86MMT compared to 16.94MMT last year. The annual US tally included 5.84MMT of imports in December, up 89 per cent, or 3.09MMT, compared to December 2019. The challenge here is there is no evidence of demand rationing as exporters continue to offer US soybeans despite the latest USDA supply data suggesting ending stocks are already extremely tight.

And the pace of soybean purchases is expected to remain at record levels in the first half of 2021 as demand continues to grow and crush margins are solid. Some crushers in Shandong province are reportedly making around 237 yuan (AU$47.37) on every tonne of beans crushed, roughly double the crush margin of this time last year.

On the corn front, tight domestic supplies have continued to push domestic prices higher and drive demand for cheaper imports. China imported a record 11.3MMT in 2020, an increase of 207 per cent on the 5.46MMt imported in 2019. This included 2.25MMT in December, more than double the quantity discharged in December last year.

Corn imports exceeded the annual tariff rate quoted of 7.2MMT for the first time last year, and it is widely touted that China’s corn imports in the 2020/21 marketing year could exceed a staggering 30MMT.

Wheat imports into China in 2020 were reported at a record at 8.38MMT close to triple imports in the previous twelve-month period. This represented 87 per cent of its annual tariff rate quota of 9.64MMT, a noticeable improvement from just 30% in 2019.

Barley imports for 2020 totalled 8.08MMT, including 0.98MMT in December, and sorghum imports have been robust in recent months with the 0.55MMT imported in December bringing the 2020 total to 4.81MMT.

With current domestic corn prices so high, China has been substituting a fair bit of their corn needs with wheat from the state reserve auctions, and cheaper imported feed grains such as corn, wheat and barley.

According to the country’s National Grain Trade Centre China sold 3.94MMT of wheat at its auction on January 13, representing a remarkable 99.74 per cent the total offered. This was up from 52 per cent the previous week and just 12 per cent at the December 23 auction.

The high clearance rate underscores the impact of soaring domestic corn prices as stockfeed manufacturers actively seek corn alternatives, especially as rising coronavirus cases spark supply concerns. The average sales price was 2,504 yuan (AU$501.05) per metric ton compared to 2365 yuan (AU$473.23) per metric tonne the previous week. Estimates put state-owned Chinese wheat stocks at around 69 MMT, or around 4-months’ supply at the current pace.

Nature threw a spanner in the works late last week with a new ASF outbreak reported in the southern Chinese province of Guangdong. It was diagnosed in 1,015 sows on a farm in Pingyuan county, killing 214 of them. According to the Ministry of Agriculture and Rural Affairs, this was the country’s first reported case of the deadly disease since October 26. And similarly, illegal transportation was suspected as the cause of the latest outbreak.

However, later reports suggested that the outbreak was a new form of ASF and may have been caused by illicit vaccines. Authorities have identified two new strains of the virus that are missing one or two key genes. The mortality rate of these strains appears to be lower than strain that ravaged the pig herd in 2018 and 2019, but it does cause a chronic ailment that reduces the number of healthy piglets born in each litter.

All known cases are believed to have been controlled through the immediate culling of infected animals, but an escalation of the situation, or further outbreaks elsewhere in China, could have a dramatic impact on domestic pork production and severely disrupt the escalating feed grain importation and consumption trend.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

USDA report has more bang than the New Year fireworks…

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It was a pretty explosive chapter in global grain markets last week. Initially sparked by the release of the latest USDA worldwide supply and demand numbers on Tuesday but then fuelled by talk of higher Russian wheat export taxes and the ongoing dryness in South America which is raising row crop production concerns for Brazil and Argentina.

The markets may have traded sideways leading into the release of the January World Agricultural Supply and Demand Estimates (WASDE), but the screens very quickly turned to a sea of green with bullish news across the board sending futures market participants into a buying frenzy.

Perhaps the biggest surprise was corn. The USDA made a small cut to US opening stocks for the 2020/21 season, but they took a scythe to the average corn yield for the recently completed harvest slashing it from 11.035 metric tonne per hectare (MT/ha) in November to 10.795 MT/ha this month.

A yield decrease of 0.24 MT/ha may not seem a lot, but it is actually the biggest ever November to December drop in US corn yield. And when it is spread over 33.4 million harvested hectares, it equates to an 8.2 million metric tonne (MMT) decrease in US production.

Add very conservative production decreases of 1.5MMT and 1MMT in Argentina and Brazil respectively, and small increases to Chinese and Indian output and global production in 2020/21 is suddenly down by 9.7MMT. Of course, with lower production comes the need to ration demand and the USDA made random cuts to the US, Mexican, EU, North African and Asian requirements, seemingly just to make the balance sheet balance.

The questionable decline in demand, in turn, led to lower world imports and thereby lower global exports. The interesting thing here was almost the entire reduction in exports was taken out of the US, which currently has the cheapest corn in the world and whose export pace is running at record highs.

How quickly things can change. Back in June forecasts for US ending stocks for the 20/21 season peaked at an extremely bearish 3.323 billion bushels (BBU), or 84.4MMT. What was the US going to do with all of that corn? Wind the clock forward seven months and the forecast for US ending stocks has more than halved to 1.552bbu, or 39.4MMT, and most in the trade expect it to be lower again next month.

The USDA still has some work to do on the Chinese corn numbers as the current pace of vessel arrivals, plus forward purchases, suggest that imports will be well above the USDA’s number of 17.5MMT.

On the soybean front, the USDA lowered global production by 3MMT. Output in the US was reduced by 1MMT, the Argentinian crop was cut by 2MMT, but the USDA buried their head in the sand with regards to Brazil, leaving the crop unchanged at 133MMT. Some private forecasters have that number as low as 128MMT with a downward bias.

The pace of exports, primarily on the back of Chinese demand, means the US balance sheet is exceptionally tight. The US will be running on fumes by the end of the 2020/21 season with the forecast carry out of 140 million bushels, or 3.8MMT, equal to just 23 days of crush demand. This dramatically increases the importance of South American production as there is almost zero ability for the US to cover any loss in production south of the equator.

China’s imports were left unchanged at 100MMT despite the current pace suggesting it should be around 4MMT higher. This allowed the USDA to add only 0.8MMT to US exports even though current shipping and sales data argue for a significantly higher figure. But with fumes to play with, how does the USDA increase US exports?

The wheat argument on its own is not a wildly bullish story at the moment but when you add the tightening corn scenario and the Russian political intervention it is difficult to see too much downside in the short term.

While still a record, the USDA reduced global production by 1MMT to 772.64MMT. Amongst the major exporters, Argentine output was cut by 0.5MMT to 17.5MMT, Russian production was increased by 1.3MMT to a record 85.3MMT despite the dryness suffered in the southern regions during the season. The big surprise was leaving Australia untouched at 30MMT, despite some local analysts now having the crop at 35MMT, or even higher.

In terms of world trade, exports out of Argentina were reduced by 0.5MMT to 12MMT on the back of lower production and Russian exports were decreased by 1MMT to 39MMT, which seems quite a benevolent response to the export tax situation. Partially offsetting these declines was 0.5MMT added to both the Canadian and EU export numbers.

On Friday, the Russian economy minister announced that the government would adopt a recommendation by a tariff subcommittee to double the proposed wheat export tax from March 1 to June 30. The tax will commence as planned on February 15 at €25 (AUD41.50) per metric tonne and then rise to €50 (AUD83.00) per metric tonne on March 1.

In addition, the government will also introduce a barley and corn export tax of €10 (AUD16.60) per metric tonne and €25 (AUD 41.50) per metric tonne respectively commencing on March 15. The government has also stated that the export taxes are likely to remain in place beyond June 30 but under a formula-based system that was set by government decree back in August of 2013 and never cancelled. This mechanism was last used in 2016 but it was zeroed on September 23 that year and has been running at that level ever since.

In late December leading agriculture consultancy SovEcon reduced its Russian wheat export forecast by 4.5MMT to 36.3MMT on the expectation that farmers would delay sales until July 2021 when the export quota and tax programs expired. With the prospect of the tax continuing into the new season SovEcon is now saying that exports could be as high as 37-38MMT as extending the tax has removed the incentive for growers to carry the grain into new crop. Their propensity to sell will also be shaped by the condition of the new crop when it emerges from dormancy in the spring.

This news magnifies the importance and ramifications for global wheat tenders, most notably from Egypt (GASC) which we saw first-hand last week. On Monday GASC announced a tender for February 18 to March 5 shipment and they passed after only receiving four offers. The lowest was Romanian at USD292.97 free on board (FOB) followed by two French offers. The fourth offer was Russian origin, but it was well off the pace at USD315 FOB.

To put this in perspective the last time GASC tendered for wheat was December 15 and the lowest FOB offer was Romanian at USD270.96. The lowest Russian offer was USD285 FOB which means that Russian export prices have rallied USD30 in less than a month. Effectively, the tax has increased export values rather than reducing domestic prices. What will happen to offers when the revised export tax and quota programs take effect in February and March?

Keep in mind, since July 1, GASC has bought roughly 4.0 MMT of wheat, and they are expected to buy another 3.5 MMT or so by the end of June. European Union inventories are tight on the back of a smaller crop and unprecedented Chinese demand which is likely to keep prices high. This is likely to push global demand to the US (supportive of futures), Canada and Australia in coming months and potentially into the third quarter, new crop Black Sea slot.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Indian farmers fighting government reforms…

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Millions of farmers from the Indian food bowl states of Punjab and Haryana have been protesting against Prime Minister Narendra Modi’s government since August last year when three agricultural reform bills were introduced into parliament which they claim threaten their livelihood. At its peak, an estimated 250 million protesters joined the cause, with many more marching in solidarity worldwide.

The contentious bills, which seek to wind back antiquated, socialist-inspired agricultural policies and replace them with a market-driven economic model, were endorsed by the President on September 27. The bills aim to end the system of government subsidised wholesale markets, or mandis, where farmers are guaranteed sales to the state. In addition, it eliminates corporate restrictions on land purchases and the stockpiling of essential commodities.

The government claims the policies will free up the industry and nationalise the market by removing the middleman and allow farmers to sell directly to private buyers such as supermarket chains and food distribution companies. The reforms are devised to give farmers the choice of what they sell, to whom they sell, and for how much.

The government believes that the new system will accelerate growth in the agricultural sector through private investment in infrastructure and supply chain rationalisation. This will improve market efficiencies and ultimately lead to higher commodity prices for the farmers.

However, the reforms do not mandate contractual obligations, and they prevent farmers from taking disputes to court, opening up prospects for abuse by powerful corporate interests. And this is precisely why the farmers fear the new system, leaving them at the mercy of big business such as the Adani Group and Reliance Industries. The landowners fear the government will compulsorily acquire their land or they will be bought out by the corporate behemoths.

Indian farmers have been unhappy for years. Declining productivity and lack of modernisation have stymied progress. Farm sizes are shrinking, as are farm incomes. More than half of Indians work on farms but farming only accounts for one-sixth of the country’s GDP. And farms are small with 68 per cent of farmers owning less than one hectare.

More than 90 per cent of the farmers sell their produce in the local wholesale markets, but only 6 per cent of them actually receive the guaranteed government price support for their crops. Prices can be extremely variable, and the middlemen form regional cartels, swallowing most of the profits. According to a 2016 economic survey, a farming family’s average annual income in more than half of India’s states was a paltry 20,000 rupees, or AU$350.

Last Thursday tens of thousands of farmers on tractors blocked an expressway on the outskirts of the Indian capital New Delhi to protest Modi’s new laws. This was one of the biggest shows of strength since the protests intensified in late November last year. The rally was called to build pressure on the Modi government in the lead-up to India’s Republic Day on January 26.

Representatives of the Indian Farmer Union met with the government last week for the eighth round of talks to resolve the long-running dispute. Prime Minister Narendra Modi’s government has offered concessions on the new laws, but to no avail. Farmer union leader Rakesh Tikait warned last Thursday that more disruptive protests were on the way, saying “the tractor march today was a trailer, the full movie will be shown on January 26.”

The government says the state-regulated mandis will continue to operate in conjunction with the new market system. In the latest round of negotiations, the government offered written assurances to the farmers that they would continue to receive a guaranteed minimum price for their produce.

Meanwhile, Indian farmers are being urged to switch some of their lands to the production of oilseeds, primarily at the expense of wheat. Historically the government sponsored Minimum Support Price (MSP) scheme, introduced to promote self-sufficiency in staples, has encouraged farmers to favour grain instead of pulses and oilseeds.

As a result, India is now the world’s second-biggest producer of both wheat and rice. Simultaneously, lower oilseed output has turned it into the world’s biggest importer of oils, meeting almost 70 per cent of annual requirements.

Imports have soared to 15 million tonnes, up from just 4 million tonnes at the turn of the century. Edible oils are now India’s third-biggest import expense after crude oil and gold. The country imports soybean oil and sunflower oil from Brazil, Argentina, Ukraine and Russia plus palm oil from Malaysia and Indonesia.

Currently, oilseeds are predominantly grown in the lower yielding rain-fed farming regions rather than on Punjab and Haryana’s highly productive irrigated fields. And market analysts say grain growers in these states are unlikely to make the switch in significant numbers unless the government offers financial assistance in the way of a MSP.

An increase in oilseed production would reduce edible oil imports, generate jobs in the domestic crush industry and conserve precious foreign exchange. It would also help the government reduce food wastage by running down huge wheat and rice inventories that lay idle in old and poorly managed government warehouses across the country.

This is certainly a testing time for the Modi government, but they are in a powerful position. They have a substantial majority in the lower house, are faced with a divided opposition and are less than two years into a five-year term. There is no doubt that Indian agriculture requires reform, but to attempt such sweeping transformation during a global pandemic and without consulting the primary stakeholders is fraught with danger.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Argentina causing grain market turmoil…

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The crippling strike by Argentina’s port-side oilseed workers was finally resolved midway through last week allowing production at the country’s soybean crush facilities to return to normal and a resumption of port loading operations along the Parana River.

The soybean crush facilities in Argentina’s main grains hub of Rosario lay idol for 20 days and exports were paralysed after the unions representing oilseed workers, and grain inspectors called a strike on December 9. They were demanding better wages to compensate their members for the countries high inflation rate, particularly for those who continued to work through the height of the coronavirus pandemic.

The new agreement includes a 25% increase in salaries to be delivered in two tranches from January to August with increases for the balance of the year to be determined by the inflation rate. The Argentine government was desperate for a deal that would revive agricultural exports and stimulate much-needed foreign exchange inflows.

Argentina is the world’s biggest exporter of soybean meal and the Parana River export facilities in the Rosario region ship around 80 per cent of the country’s agricultural exports each year. The strike halted the loading of export vessels with as more than 170 sitting at anchor when the union members returned to work last Wednesday. That backlog will take weeks to clear as port stocks will have to be replenished before loading can recommence.

However, members of Urgara, the union representing the countries grain inspectors, continue to strike after failing to reach agreement on a wage deal with the Chamber of Private and Commercial Ports (CPPC). The union wants salary increases and an extraordinary bonus for its members who worked during the COVID-19 crisis.

The companies that are members of the CPPC are the same international agricultural export companies that settled with the oilseed workers’ unions last week. Urgara’s strike has the biggest impact on Argentina’s southern, open sea ports of Bahía Blanca and Necochea, as the processing and export companies operating in the Rosario region tend to avoid hiring workers affiliated with the militant union.

Meanwhile, as the oilseed workers returned to the job last Wednesday the country’s agriculture ministry blindsided global grain markets by announcing a suspension to export corn sales until the end of February, in an effort to safeguard domestic food supplies and quell inflationary pressures.

According to a government statement “this decision is based on the need to ensure the supply of grain for the sectors that use it as a raw material for the production of animal protein such as pork, chicken, eggs, milk and cattle, where corn represents a significant component of production costs.”

Argentina is the world’s third largest exporter of corn and up to the end of last month, 34.23 million metric tonne (MMT) of corn from the 2019/20 season has been authorised for export, out of an exportable surplus of 38.50MMT. The government said the measure was implemented to ensure that the remaining 4.27MMT was available for the domestic market over the summer months, especially since winter crop production was affected by the drought.

This is quite a drastic step for a government that is desperate for foreign currency, and the move is at odds with both corn industry and grower associations. They too were stunned by the action as they were not consulted and do not believe the corn supply situation warrants such drastic government intervention at the moment.

To add insult to injury, the La Niña weather pattern continues to dominate Argentina’s climate with moisture deficits across the row cropping regions growing by the day. Light showers are forecast across the western and southern fringes of the summer crop belt over the next week. But the 11-15 day and the 16-30 day outlooks both favour below-average rains and average to above-average temperatures.

The Bueno Aires Grain Exchange rated the soybean crop 42 per cent good-to-excellent against 55 per cent last year. Even more alarming was the early planted corn crop rating of just 17 per cent good-to-excellent, against 35 per cent a year ago.

The bottom line here is the moisture stress area is expanding rapidly and already covers about half of Argentina’s soybean and corn crops. This is likely to grow given the drier than average forecast for the balance of January. The dryness and heat have limited new crop corn seeding progress to just 75 per cent of the intended area, and if the weather in Argentina refuses to cooperate the world has itself a growing row crop supply dilemma.

Multinational grain exporters are already worried that Argentina’s Peronist government could extend their old crop export sales ban to new crop corn and soybean products should the current drought worsen or spread over the next two months. The export ban is also likely to discourage farmers from completing the remaining corn and soybean seeding program amid declining domestic corn values and inadequate soil moisture.

Grain markets farewelled 2020 with fireworks across the board. Soybeans closed above US$13 per bushel for the first time since 2014; corn posted its longest-ever rally and wheat climbed to a six-year high.

The strikes in Argentina have certainly influenced bean values over the past couple of weeks, but it is the prospect of strong demand in 2021, particularly from China, that has been the focus. There is zero room for weather issues in any of the major producers, so the prospect of lower production out of Argentina due to the ongoing drought and less than ideal finishing weather in Brazil has global consumers concerned.

The corn market has all it could hope for at the moment, strong demand, weather hit supply and political intervention. The rally last week, albeit on thin trade, pushed corn values to a six-year high after the Argentine government suspended export licences. Add the realisation that China may have reached a level of corn demand where they are no longer self-sufficient, and the global balance sheet gets tighter by the day.

While the planting of US summer crops is still months away, the race for acres is heating up. A tightening global soybean balance sheet and the lowest US ending stocks in seven years is telling growers to plant more beans. But the prospect of growing import demand from China and production issues in Latin America creates a compelling argument to increase corn plantings. No doubt soybeans will stand tall if corn wants to buy acres at their expense.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

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