trade deal Archives | Grain Brokers Australia

Sorghum production forecast to be lowest in 50 years…

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What a difference a month makes. Substantial rainfall across the majority of nation’s winter and summer cropping regions over the last four weeks, on top of isolated storms in the preceding five weeks, has swung the mood across rural Australia from one of heightened pessimism to one of guarded optimism.

The vision on our television screens of flooded roads, overflowing gutters, children playing in puddles and farmers dancing in the rain have been a welcome distraction from the summer bushfires and the global coronavirus pandemic.

While there is still a long way to go, the general change to the weather pattern has growers and consumers across the country genuinely excited about crop prospects for 2020 and the possibility of a significant turnaround in domestic grain supply compared to the previous two seasons.

After such a prolonged dry spell, particularly in the eastern states, the soil moisture in many regions was at record low levels entering 2020. Replenishing those soil moisture reserves will be a long process with above-average rainfall required for a prolonged period of time.

The recent widespread falls have started the process of reducing the significant rainfall and soil moisture deficits accumulated over the last couple of years. However, despite substantial registrations in many locations, most were still below the long term average for the December to February period.

The rainfall has not been confined to the cropping regions. Drought affected pastoral districts have seen an unbelievable turnaround in pasture growth and feed availability. But most graziers were forced to substantially reduce stock numbers during the drought as the cost of maintaining livestock became prohibitive.

They are now looking to restock as quickly as possible to utilise the abundant forage. The challenge here is the rains have been so widespread that the demand for restocking quality sheep and cattle is unprecedented. It has forced the price of store stock in sale yards across the country to extraordinary levels.

Many livestock producers who have the option of planting a winter crop are looking to sow paddocks that haven’t seen a tractor for many years as the costs involved in buying stock make growing a crop a much better financial option this season.

Growers with mixed farming enterprises will almost certainly have an extra paddock or two allocated to winter crop when planting commences as their livestock numbers are well below normal levels. This means that the potential area available for winter cropping in the eastern states of Australia in 2020 will be substantially higher than in recent years. The potential for a big crop is building, but there is still a very long way to go.

Meanwhile, in Queensland and northern New South Wales, the limited area sown to sorghum this summer now has a genuine shot at achieving average yields, assuming regular rainfall continues for the balance of the growing season. It is extremely difficult to get an accurate handle on the actual area sown as the planting rains came so late. Suffice to say it was well below the total area growers intended to plant if the rains had been timelier.

At this stage, total production in Central Queensland, Southern Queensland and New South Wales are estimated to be 250,000 metric tonne, 125,000 metric tonne and 75,000 metric tonne respectively. That comes to a total of 450,000 metric tonne and would make it the smallest Australian sorghum harvest since the 1969/70 season.

One of the biggest challenges of a late sown sorghum crop in southern Queensland and northern New South Wales is the autumn/winter harvest. Getting grain moisture readings down to acceptable levels can be a challenge as the days are quite short, there is invariably a morning dew, and the daytime temperatures are much cooler. The harvest also tends to be occurring when the winter crop is being planted which strains farm resources and challenges management priorities.

In international sorghum news, the United States Department of Agriculture has revealed, via its daily reporting system, that China has purchased 110,000 metric tonne sorghum. The global trade has been waiting for news of grain sales to China as a sign that it was starting to fulfil the Phase 1 commitments it signed off on in mid-January.

Last week’s transaction is the first single sale of more than 100,000 tonne of any agricultural commodity to China since the trade deal was signed. As part of the continuous disclosure regulations in the United States, exporters must promptly report such transactions, commonly referred to as flash sales. Sales of smaller amounts only have to be reported on a weekly basis.

According to USDA export data, China has booked more than 475,000 metric tonnes of sorghum this marketing year. However, that total does not include sales of 325,000 metric tonne to ‘unknown destinations’ in the third week of February. Sales tagged accordingly are usually destined for China, and the trade is confident they were the buyer in this instance.

The USDA estimates that the US farmer planted 1.9 million hectares of sorghum last summer. This is 7 per cent lower than the previous two seasons and is well down on the peak of 6.7 million hectares back in 1986/87. Production in that year was just short of 29 million metric tonne, compared to 8.7 million metric tonne this marketing year.

China has been a traditional destination for Australian sorghum in recent years, particularly for the Baijiu market, But, one thing is certain, Australia will not be challenging the United States for bulk sorghum business into China in 2020.

US-China trade deal ‘totally done’…

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Farmers in the United States have received an early Christmas present after Beijing and Washington finally arrived at a preliminary agreement to lift some tariffs of Chinese imports in exchange for purchases of a range of US goods and services, including agricultural commodities.

China was first to announce the deal, which follows almost two years of protracted negotiations, punctuated by Trump’s tariff hikes and Beijing’s immediate retaliation.

The US trade representative Robert Lighthizer was quite upbeat about the phase one deal saying it was ‘totally done’ and would be signed in January. However, the Chinese were far more guarded in their comments, stating that they would act reciprocally and that they had not decided when they would ink the deal.

The US is ostensibly retaining 25 per cent tariffs on US$250 billion of Chinese imports while halving the tariff rate it imposed in September on US$120 billion of Chinese goods from 15 per cent to 7.5 per cent. The US has agreed not to proceed with 15 per cent tariffs scheduled to take effect on December 15 on almost US$160 billion of Chinese imports, and Beijing has cancelled its retaliatory tariffs which were due to commence at the same time.

China has committed to increase purchases of US agriculture products by US$32 billion over two years, but this appears to fall well short of Trump’s boast in October that China would increase purchases of US farm goods to as high as $50 billion annually in two years.

The increase will be measured against the 2017 level of US agricultural and related product exports to China, the last full year before the trade war commenced. In that year, China’s purchases totalled $24 billion, bringing the annual commitment to just US$40 billion, or US$10 billion short of Trump’s objective.

Lighthizer said Beijing would aim for an additional US$5 billion in farm purchases annually, but there were no guarantees. He said broad targets for Chinese acquisitions would be released publicly. There would also be more specific targets for purchases on a range of products, but those would not be made public to avoid distorting markets.

US exports of soybeans have been hit hard by the trade dispute, and China said they would immediately increase their purchases of US beans. However, they did place a significant caveat on that action saying imports would be based on domestic demand, and the US had to be competitive compared to alternative origins.

Lighthizer confirmed that notion by declaring Beijing would be free to buy “when it’s the perfect time to buy”. Given that from February onwards, South American soybeans are generally cheaper than US imports, even without tariffs, it begs the questions as to eventual subsidies by the Chinese government on purchases of US soybeans.

The China trade representative stated that they would increase their buying of US wheat and corn, not hard since they bought nothing over the last year, but the quantities would be subject to quotas. In any case, the deal is supposedly bullish on corn, with potential for an additional 3-4MMT of imports from the US, and as one market pundit said, ‘corn is the locomotive that pulls the wheat train”. 

But many in the trade question whether it is actually feasible to achieve the additional purchases of US$16 billion per annum in 2020 and 2021. Under China’s Tariff Rate Quota (TRQ) system for certain agricultural products, the total quotas of 9.2 million metric tonne (MMT) for wheat and 7.6MMT for corn equate to just US$3.5 billion.

On the futures market, it was a case of buy the rumour, sell the fact. The news of an impending deal surfaced on Thursday last week and corn, wheat and soybean futures were all up. Come Friday, the markets started the day in positive territory but gave away those gains when the deal was announced. A very subdued response from the funds which are sitting on short positions in both corn and soybeans.

Given the conflicting rhetoric throughout the negotiation process, it would be understandable if the funds and traders want to see more details and some supporting action from China before they get too excited.

Early celebrations could also be embarrassing knowing that China still holds hefty tariffs on US soybeans and pork, only waived at their discretion. And there is the prospect of a record Brazilian soybean harvest in early 2020, much of it driven and financed by China’s tariff on US soybeans.

The trade deal with China comes at a critical time for Trump, just a couple of days before a new round of tariff increases were set to take effect. The impeachment process has also been stealing the headlines in recent weeks, and Trump is desperate for some good news to deflect attention away from the impending trial.

Next year is an election year in the US and Super Tuesday, the first big test of voter sentiment, is only eleven weeks away. More delegates to the presidential nominating conventions can be won on Super Tuesday than on any other single day on the primary calendar, and it is a critical test for presidential candidates from both sides of US politics.

In an attempt to keep the good news rolling, Trump said negotiations on a “phase two agreement” with China would begin immediately, instead of waiting until after the 2020 election.

Hopefully, news of the trade deal is not another empty political promise to farmers, but the beginning of a commitment to right the vast amount of damage done to the global agricultural economy over the last two years.

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