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Weather, politics driving grain trade

The world’s grain markets face a year of challenges and uncertainty, with weather and politics likely to drive trade flows and prices, said the keynote speaker at the Global Grain Conference in Geneva, Switzerland.

The trade war between the United States and China has changed the landscape and, if settled, could once again mean massive changes, said Dan Basse, president, AgResource, Chicago, Illinois, U.S. Huge government debt, the likelihood of interest rate increases, and volatile currencies are among the potential threats the market faces.

 
He added that demographic changes mean the demand growth focus is shifting to Africa.

Basse described the market ahead as “a more vibrant market and more vibrant opportunity forthcoming.”

He noted that over 80% of trade in Chicago is now non-human.

“It is not a person who is actually making a decision to buy, sell or what to do,” he said.

“We’re kind of going with fund positions in a sideways range,” he said. “Rallies in Chicago or in other markets are really being due to something called supply dislocation — in other words, weather and adversity. We haven’t had a demand-led market for a very long time. When we have a weather event like the Argentine drought last January, we get a lot of buying. The reason that is occurring is that people can feel, taste the forecast.”

The world political and economic order has become disorder, he said.

“In the White House, in the United States, we have a president called President Trump,” he said. “We have Brexit, which we may have an agreement coming now and it looks like maybe we’ll have some solution by March, again a possibility. We have central banks that are raising interest rates. We have regional protectionism on trade. We have lots of things happening.”

This year’s Black Swan event was U.S. trade sanctions against China, he said.

“At one point the United States had agreed to a Chinese deal,” Basse explained. “Back in the middle of May, our Secretary of the Treasury, Mr. Mnuchin, had said yes to China and we negotiated over the weekend and got a deal that the Trump administration approved. The deal could have meant an extra $30 billion in agricultural demand coming to the U.S. We came back after a holiday (May 28) and the Trump administration said: ‘deal off,’ and the trade war started. I don’t have any idea when the trade war will end. It doesn’t only involve soybeans, it involves things like distillers’ grains and wheat and corn.

“Today we see the world wheat stocks-to-use ratio at a record low. That makes 2019 a very, very important year for world production.”

At the same time, weather patterns are changing.

“This last year we saw a very dramatic drought in Argentina,” he said. “Australians are seeing their second drought in a row. We have problems in Europe. Climate change is real.”

New drivers are emerging in the wheat market.

“World wheat trade has increased nearly 90 million tonnes in just the last eight or nine years,” he said. “This is a big change.”

World meat production is at record levels.

“There is no indication world cattle, hog, or poultry producers are ending their expansionary plans,” he said. “We do have this thing called African swine fever that is affecting the whole herd within China. African swine fever is the Ebola of hogs. This disease has been around since 1907. There is no cure.”

Basse expressed concern that incidence of the disease in China may be underreported.

Effect of the rising dollar

The U.S. dollar has risen, along with U.S. interest rates.

“We wonder, however, could we get a top in the first quarter in the U.S. dollar as interest rates start to level off or at least peak in the United States?” he asked.

U.S. debt is up to $21 trillion, with interest payments that will cost more than the military budget by 2023.

“This big debt pile that the world and the United States has built up will have consequences and it is something that we in the grain trade need to be talking about,” he said. “Today we see the grain markets caught in political and fundamental crosscurrents. One can be bullish of wheat based on losses around the world. One can be bearish of soybeans because of the trade war that is now ongoing between the United States and China and the big pile of beans that is developing in the United States. Corn is kind of caught in the middle.”

On demographics, he highlighted Africa as the part of the world with the population growth and potential for increased demand, while growth in population is slipping in other regions. Demand in the continent is up 60% over the last decade.

“I was just in Nairobi,” he said. “I can tell you African demand for wheat is alive and well. Many trading companies see Africa as the next bright spot in world wheat trade going forward.”

He explained that interest rates are historically low, even with likely rises.

“This is not normal,” he said. “What makes it different this year is world debt. The world is sitting on a mountain, and I mean a mountain, of debt in countries like the United States and others that borrowed heavily during that downturn.”

A strong dollar has hit U.S. farm incomes.

“U.S. farm income is down 50% from where it used to be back in 2012,” he said. “My U.S. farm clients are struggling mightily. Yet, if I go to places like my office in Brazil, they are loving life and making lots of money … the difference being currency.”

Basse said President Trump has polarized the United States.

“This gentleman has created chaos,” he said. “We just finished a trade negotiation with Mexico and Canada.”

He noted that the new Democratic majority in the House of Representatives could mean that it isn’t approved.

“But as I look at the details of those trade pacts, there were only marginal victories,” he said. “In the dairy industry we will get about 3.6% more U.S. dairy industry into China. It happens over seven years. When I look at the amount of extra pork or cheese we may get into Mexico, it is a modest amount.”

Climate change impact

Basse explained that China now holds 61% of the world’s corn and wheat stocks, yet the reaction when the figures came out in November’s WASDE report was muted. He suggested that the USDA should keep two separate balance sheets: one for the world including China, one for the world without China.

On climate change, he said there’s no doubt that world temperatures are rising.

Stagnant weather patterns had produced, for example, the 2018 summer drought in Europe and the Black Sea.

“A lot of our winter grains are going into dormancy with less than adequate soil moisture,” he said.

Basse sees world wheat prices heading upwards. He put supply this year down by 27,000,000 tonnes.

“The climate in Russia is about twice as volatile as the U.S.,” he said. “The Russian stock-to-use ratio is the lowest since 2000-01, 5.9 million tonnes, or 8%. I believe the Russian wheat market is broken. The price of wheat in Russia has been generally going up.”

He discussed the threat of limits on exports.

“If you’re Russia, you’ve been pushing wheat out of the back door as fast as you can,” he said.

He did not think the Russian government was going to put a ban in place but suggested that other restrictions could be introduced. The effect of Russia’s rush to export has been a substantial fall in E.U. wheat exports over the first three months of the marketing year.

“Catching up to make up for the first three or four months of the year will be difficult,” he suggested. “Next year, we need another big crop to keep the (wheat) market constrained. There is not an abundance of world corn in the market either. It’s not only the wheat market that is starting to see a world demand driver, it is also starting to happen in corn.”

As China left the soybean market in the United States, there have been big spikes to other locations, he said, pointing out large exports to Mexico, for example.

“Even if we come out with a trade deal with China, I have trouble being bullish,” he said of the well supplied soybean market

He described himself as “bullish of wheat, neutral of corn, bearish of soybeans,” but a trade deal between China and the United States could change the situation.


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