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Global wheat values rally as the Australian harvest commences…

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International wheat prices continued to firm last week on the back of crop downgrades in the southern hemisphere, delays to the spring wheat harvest in North America, rumours of Chinese interest in United States wheat and firmer cash offers, particularly out of the Black Sea region.

All this drew attention away from burdensome global wheat supplies and prompted a round of short-covering by both the trade and funds, with the latter square or slightly long by week’s end.

The Chicago Board of Trade soft red winter December wheat contract closed Friday’s session at a fourteen-week high of 532¼ cents per bushel (c/bu). This is a rise of 78¾ c/bu, or 17.4 per cent, since the most recent contract low of 453½ c/bu, set on September 3. The contract rose 24 ¼ c/bu across the week, or almost 5 per cent, to register its seventh consecutive weekly advance.

Argentine wheat crop estimates continue to leak lower on the back of sustained dryness across crucial production areas. Recent rains in many regions have not been strong enough to help wheat fields left gasping for moisture after weeks of dryness.

Weather and crop forecaster Maxar is calling the Argentine wheat crop 18.7 million metric tonne (MMT), and at least one commercial trading house is said to be calling the wheat crop as low as 18.2MMT. This compares to the latest USDA estimate of 20.5MMT.

The Buenos Aires Grain Exchange (BAGE) suggested that while crop potential had stabilised in the east, yield losses could be as high as 40 per cent in southern Cordoba, eastern La Pampa and western Buenos Aires, and this number could potentially increase if critical spring rains do not arrive in time.

BAGE still put the winter wheat area at 6.6 million hectares, but it appears that they are preparing the market for a downward revision of their current 19.8MMT forecast when they update production estimates sometime this week.

The spring wheat harvest in the Dakotas and Minnesota continues to be dogged by rainfall, snow and blizzards. There is talk that any unharvested wheat is either going to be ploughed under for insurance, grazed out, or baled up for hay as the weather is now unlikely to remain favourable for long enough to get a header into the fields.

If that is true, global supply may end up losing 20 or 30 million bushels (550,000 to 820,000 metric tonne) when the USDA update production numbers in their November report.

The Canadian farmers are faring much worse, as rains and snow continue unabated. At least a quarter of the Canadian Western Red Spring (CWRS) wheat crop yet to be reaped. While 95 per cent of the wheat area in Manitoba had reportedly been harvested by last week, only 70 per cent of the Saskatchewan crop and 60 per cent of the Alberta crop was thought to be in the bin.

Rumours surfaced midway through last week of China wanting to purchase as much as 2MMT of wheat from the United States. There was no talk of wheat being on Beijing’s US$50 billion shopping list when news of the trade war breakthrough surfaced last week, and there are still no details, no grade breakdown, and no indication of anyone asking for offers.

However, news that wheat may now be included in the yet to be signed trade deal has generated some excitement in the US, and the futures and cash markets reacted accordingly.

Meanwhile, Egypt’s state-owned grain buyer GASC announced last week that it had purchased 405,000 tonnes of wheat for November 21-30 delivery in its latest tender. The purchase included 285,000 metric tonnes of Russian, 60,000 metric tonne of Ukrainian and the same quantity of French origin.

The average purchase price was around $212.50 FOB and once freight was added it equated to $230.70 C&F. The price reflected the significant rise in European Union and Black Sea markets since the start of the month. The average Black Sea FOB price was US$8.70 higher than the previous GASC purchase on October 9.

The higher price follows a rally in domestic wheat prices in Russia in recent weeks, and there appear to be several factors at play. There are reports of significant trade shorts that have been forced to cover when the market move caught them off guard, and there are also traders getting long in anticipation of further market gains.

The internal rally has also stoked up demand from the domestic sector in Russia. This is particularly the case for milling wheat which is reacting to competition from Kazakhstan due to their crop shortfall. Kazakhstan is the world’s second-biggest flour exporter, and a significantly smaller crop this season, along with poor quality, has sent buyers across the border to try and cover the supply deficit.

Here in Australia wheat prices were stable to slightly firmer last week despite a further deterioration in crop conditions in most regions. The National Australia Bank decreased its domestic wheat production forecast by 1.5MMT to 15.5MMT compared to their September number.

Interestingly, the rally in Russian wheat prices has seen the spread to Western Australian export values narrow to around US$30. This was as high as US$50 only one month ago but is still too high for domestic exporters to buy international demand, even with the freight advantage Australia holds into key Asian destinations.

Reaping may have started in a number of areas, but the harvest price pressure is still ahead of us. It remains to be seen how that will play out this season. There is likely to be a reluctance on behalf of the trade to repeat last year’s harvest buying spree unless they can compete into the export market. But how will the grower react if prices fall?

Uncertainty around the final size of the Australian wheat crop and the exportable surplus only adds to the conundrum.

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

Who holds the Trump card in the ongoing trade war?

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World agricultural commodity markets look set for continued volatility as the trade truce between the United States (US), and China appears to be dead in the water. Late last week both Washington and Beijing released statements suggesting that a deal to end the bitter trade dispute was unlikely in the short term.

Negotiations have been at an impasse since May with both sides claiming the other reneged on provisions of a tentative deal. Tensions escalated last Thursday when The Don (Trump) announced, via Twitter, a new tariff of 10 per cent on US$300 billion worth of Chinese imports that aren’t already subject to US duties.
This is on top of the US$250 billion worth of Chinese imports that are already subject to a 25 per cent tariff imposed mid-way through last year. The new tariff is set to come into effect on September 1.

It was no surprise to see China respond to the latest announcement by saying that they would take all counter-measures necessary as a result of the escalation in the trade conflict. However, the trade imbalance is a huge challenge for China. Washington has the potential to tax around US$540 billion worth of Chinese imports, but Beijing only has around US$120 billion worth of US goods it could target.

That said, President Xi Jinping does hold one significant trump card. China controls more than 90 per cent of the world’s production of rare earths, a group of 17 metals with magnetic and conductive properties that power most of the globe’s electronic devices. More importantly, it also accounted for 80 per cent of all US rare earth mineral imports between 2014 and 2017.

Chinese imports of US agricultural commodities have fallen dramatically as a result of Don’s Party (the trade war). Beijing retaliated to the initial round of US duties by slapping a 25 per cent tariff on a long list of US goods, including soybeans, in July 2018.

China is by far and away the world’s biggest importer of soybeans. The burgeoning demand for soybeans in China over the last ten years has been driven by an explosion in demand for meat as consumers shift from a diet dominated by rice to one where pork, poultry and beef play an increasingly important part.

In 2017, Brazil and the US were the two biggest soybean exporters, totalling US$25.7 billion and US$21.4 billion respectively. China accounted for two-thirds of global trade, importing US$39.6 billion worth of beans. In the same year, US exports were around a third of Chinese soybean purchases. At just under US$14 billion, soybeans were the second most valuable US export to China, behind aeroplanes.

However, the US share of that import demand has changed dramatically as a result of Don’s Party. Up to the end of May this year, US soybean exports to China were less than 6 million metric tonne (MMT), with a value of around US$2.7 billion. In volume terms that is almost an 80 per cent decrease compared to the three-year average of 29MMT for the same period.

It is no accident that the Chinese chose to impose tariffs on soybeans. The biggest producing soybean states are across the US Midwest, and this is The Don’s heartland. The farmers voted him into office. Beijing hopes that the farmer will either lobby Washington to solve the impasse or desert Trump at the ballot box in next year’s election.

So, what does The Don do to appease the US farmer? He announces another support package worth a monstrous US$16 billion, that’s what! According to a United States Department of Agriculture (USDA) announcement late last month, the latest Market Facilitation Program (MFP) payment “is aimed at supporting American agricultural producers while the Administration continues to work on free, fair, and reciprocal trade deals” with China.

This is the second round of trade assistance announced by the US in response to what Washington termed as “unjustified retaliatory tariffs” on agricultural commodities. The first program, totalling US$12 billion, was announced in August 2018, with payments made in the third quarter of 2018 and the first quarter of 2019.

Primary producers can qualify for payments ranging from $15 to $150 per acre for row crops under this year’s version of the MFP, with rates varying widely by county and region. The rates are based on the historical mix of crops produced by each county as well as USDA’s calculation of the impact on each commodity of unfair trade practices over the past ten years.

The first tranche of payments is expected to begin this month with a potential second wave in November and a third, and final, distribution in January 2020. The USDA said that the second and third payments could be cancelled if the trade war with China is resolved beforehand.

The irony is that recent research has found that 10 per cent of the recipients, predominantly large corporate farms, are receiving a whopping 54 per cent of the payments. The vast majority of US farmers, the smaller operators, those with the least ability to cope, but are copping the brunt of Don’s Party, have been abandoned as the payments are proportionate to farm size and success.

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

Chinese economy faltering as Don’s Party rolls on…

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News that a Chinese trade delegation had cancelled this week’s planned visit to farms in the states of Montana and Nebraska has put a dampener on the upcoming US-China trade negotiations. The delegation reportedly headed back to Beijing earlier than scheduled after mid-level talks wound up in Washington late last week.
The delegation was involved in preliminary trade talks with US officials to find a resolution to the ongoing trade war (Don’s Party) ahead of cabinet-level negotiations which are scheduled to take place in Washington in October. Their early departure has raised doubts about a possible breakthrough and sent US soybean futures more than 1 per cent lower in Friday’s trade.

High hopes were set for last week’s trade talks in Washington, which came after both sides softened trade tensions earlier this month with gestures such as tariff exemptions and delays. China purchased 600,000 metric tonne of US soybeans the previous week and said it would exempt American pork and soybeans from additional tariffs, taking effect this month, as a sign of goodwill heading into the talks.

The plan for the farm visit was only announced a few days earlier and the sudden change of plans appears to have come on the back of comments from US President Donald Trump (The Don) saying that he wanted a complete trade deal with the Asian nation, not just an agreement from China to buy more agricultural goods from the United States.
But both sides moved quickly over the weekend to indicate that the negotiations will continue, and that high level talks pencilled in for October would still proceed. The two countries agreed to keep communicating on related issues and discuss the details of the next round of trade talks.

Negotiators on both sides have continued to look for an avenue to resolve their differences as tensions ratcheted up a notch or two over the northern summer. Both the US and China want to see a resolution to the long running dispute, particularly with the United States heading into elections in 2020.

However, plentiful global grain supplies and declining Chinese demand has dulled their appetite for imports. Overall feed grain demand in China is expected to decline amid substantially lower domestic swine inventories due to the continuing African Swine Flu epidemic.

It seems that the biggest hurdle facing negotiators on both sides may be agreeing on the scale and ambition of any deal they try to formalise. China wants to agree on a partial deal that would head off Washington’s planned tariff increases on Chinese imports in October. ‘The Don’ clearly wants a far more comprehensive deal.

US soybean exports have been the hardest hit by Trump’s brinkmanship and the Brazilian farmer has been the biggest beneficiary. One of the best barometers of the degree of tension surrounding US-China trade negotiations this year has been port price premiums paid for Brazilian soybeans over US soybeans. When the tensions escalate, premiums develop at the Brazilian port of Paranagua over US Gulf ports. Similarly, when tensions diminish the premiums slowly fade.

These price premiums have risen and fallen within the context of global price movements that have centred on the progress of the 2019 US crop. Prices rose in both Brazil and the US as the early season wet conditions hindered corn and soybean planting in the US and high water levels in the Mississippi River raised the cost of moving old crop soybeans to US Gulf ports. As conditions have improved over the past couple of months, prices of both Brazilian and US soybeans have trended lower.

The rise and fall of the Brazilian export premium correlates directly with the rise and fall of trade tensions. In May this year, the US announced plans to raise tariffs on $200 billion of Chinese products from 10 to 25 per cent. Brazilian soybeans moved to a 7 per cent premium over US soybeans as a result. The premium gradually fell back to around 1 per cent by late July. However, a new round of tariff hikes that took effect on September 1 pushed Brazilian premiums up again to almost 10 per cent.

The concern for Australia is that any deepening of the trade impasse will potentially weaken an already vulnerable Australian economy. The trade crisis comes amid a weakened domestic housing market and stifled economic growth. The health of the Australian and Chinese economies is intricately linked. Our agricultural exports, mining exports, tourism exports and education exports all depend heavily on China.

As Don’s Party rolls on endlessly, China is beginning to admit its traditionally high rates of growth are in jeopardy. And the latest numbers tell the story. Industrial production growth fell to 4.4 per cent in August, its lowest in 17 years. Growth in retail sales also fell last month to 7.5 per cent. A lofty number by Australian standards but much lower than the 10 per cent growth consistently seen over the last ten years.

Beijing is now saying that it will be very difficult to grow at 6 per cent this year, well below the numbers seen in the years since the global financial crisis. If Chinese growth continues to decline it will undoubtedly be reflected in demand for Australian goods and will have countless flow on effects across the domestic economy.
The best result for all concerned, including Australia, would be a swift resolution to the standoff. No doubt this is front of mind for Prime Minister Scott Morrison as he tours the United States and meets with The Don.

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

US-China trade war is now a love fest…

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World grain markets trod water early last week ahead of Thursday’s release of the October World Agricultural Supply and Demand Estimates (WASDE). Ramifications of same were quickly forgotten after the announcement on Friday (Saturday morning Aussie time) of an interim trade pact between China and the United States (US).

US futures were a sea of red on Thursday following the release of the WASDE report, with CBOT wheat, corn and soybeans closing down 9 cents per bushel (c/bu), 14¼ c/bu and 1¼ c/bu respectively. That all turned around on Friday after news of the trade deal broke with wheat up 16 ½ c/bu, corn gaining 18 c/bu and soybeans up 10¾ c/bu.

The Friday action was predominantly fund buying as they scrambled to cover their shorts. They are reported to have purchased 40,000 contracts of corn, 15,000 contracts soybeans and 10,000 contracts of wheat. This equates to 5MMT, 2MMT and 1.4MMT of corn, soybeans and wheat respectively. Not bad for a day’s work!

Political pressure had been mounting for both leaders to reach a compromise after economic headwinds had struck both economies in recent months. It also came at a time when both leaders were trying to deflect attention away from domestic issues; impeachment for Trump and unrest in Hong Kong for Xi Jinping.

Trump had been holding out for a comprehensive deal that addressed a range of concerns around Beijing’s management of its economy. The Chinese negotiators were equally resilient, responding to US threats of increased tariffs with new measures of their own and refusing to include many of the US concerns in negotiations.

In the end, it seems that they have settled on an interim agreement that involves China buying more US agricultural products and undertaking several minor measures to open up its economy in exchange for the United States waiving the planned tariff increase set to take effect this week.

According to President Trump, the agreement was going to be great for both countries and was “a great deal for world peace. You know there was a lot of friction between the United States and China, and now it’s a love fest.”

He said that Beijing had agreed to buy $40-50 billion worth of US agricultural products which was a massive win for the US farmer. With the summer crop harvest ramping up in the US at the moment it will certainly be welcome news across the US corn belt, a key area for Trump in his run for re-election in 2020.

With the details of the pact yet to be inked, the biggest concern, for now, is how long the renewed affections will last and whether the deal will ever be consummated.

Meanwhile, there were a few surprises in the United States Department of Agriculture (USDA) October WASDE numbers compared to the previous month. The corn yield was raised slightly from 168.2 bushels per acre (bu/ac) to 168.4 bu/ac. It may have been quite a minor increase, but the trade was expecting a decrease of as much as 3 bu/ac. The USDA did cut the expected harvested area by 200,000 acres leading to a fall in US production of 0.5MMT.

Global production was decreased by 1 million metric tonne to 1.104MMT with non-China production decreasing by the same amount to 850MMT. Ending stocks were up in Brazil and Mexico and down in the US and Ukraine. The net effect was a fall of almost 4MMT in global and non-China ending stocks to 303MMT and 107MMT, respectively.

On the soybean front, the USDA reduced the expected harvested area by 300,000 acres to 76.5 million acres and cut the forecast yield from 47.9 bu/ac to 46.9 bu/ac. This led to a decrease in US production of 2.25MMT compared to the September estimate. Production in all other major production jurisdictions remained the same month-on-month resulting in a global number of 339MMT.

Soybean ending stocks were reduced in the US by almost 5MMT. This was partially offset by increases in both Argentina and Brazil culminating in a net fall of 4MMT to just over 95MMT globally.

World wheat production was virtually unchanged at 765MMT, but the numbers for several of the major producers are questionable. The USDA reduced the Australian crop by 1MMT but still have us pencilled in for 18MMT. The crop in Australia is suffering big time at the moment, and anything above 16MMT would be a miracle.

Argentinian wheat production was left unchanged at 20.5MMT. However, the season has taken a turn for the worst in many areas with drought conditions expected to have a significant impact on final yields. The provinces of Cordoba, La Pampa and the west and south of Buenos Aires province are in serious need of rain to arrest the decline.

The Buenos Aires Grain Exchange have reduced their production estimate from 21MMT to 19.8MMT and called the wheat crop 23 per cent good /excellent, against 30 per cent last week and 37 per cent last year. The Rosario Grain Exchange have also cut their estimate by 1.5MMT to 20MMT. However, private forecasters are saying wheat production could already be less than 19MMT.

The biggest swinger in the world wheat space could be Russia. The USDA left production unchanged at 72.5MMT, but Russia’s Agriculture Ministry put production at 75.6MMT with 1-1.5 million hectares still to harvest. That means that the early season forecasts of a 78MMT Russian wheat crop is highly possible.

This all means that the world wheat balance sheet is burdensome. Production is 30MMt higher than last year, projected global demand has fallen by 8MMT since the June WASDE report, forecast exports have dropped 6MMT over the same period, and world ending stocks are now expected to be 4MMT higher year-on-year. Competition from the major exporters is increasing, but world stocks continue to grow.

Wheat is lacking a significant demand driver at the moment, and the overall landscape is only likely to change if there is a significant weather event to disrupt supply or a political event that interrupts traditional trade flows.

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

Tim Byass, Grain Brokers Australia

Trump remains popular among US farmers

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Last week at the Australian Grains Industry Conference (AGIC) WA Grains Business Development Manager, Tim Byass met with Sara Wyant, veteran US agricultural journalist and editor of Agri-Pulse.

Ms Wyant said Trump remains popular among US farmers and that agriculture was enjoying near-unprecedented access to the president with strong influence in terms of key issues such as trade policy.

“The map of where his voters sit has been critical, his position on trade policy has made agricultural people nervous, but you see with the North American Free Trade Agreement (NAFTA), he nearly threw it out but the opinions of the farmers, those that elected him, were considered.”

Listen to the ABC radio interviews below by Clint Jasper on Trump talking the type of talk farmers want to hear and US trade restrictions.

Tim Byass, Grain Brokers Australia

Tim Byass, WA Grains Business Development Manager comments on Trump policies

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