China's currency policy likely to support grain prices

Grain prices are likely to get support from China's decision to make its currency exchange rate more flexible, while adverse weather in North American growing regions is adding to a bullish tone developing in the market, according to analysts.

 

Increased Chinese purchasing power will likely boost the country's imports and lift grain prices, which were subdued in the first half of the year due to bearish supply-side fundamentals, although the size of the leg-up could depend on how far and fast the yuan moves.

 

Following Beijing's statement over the weekend, its currency will ultimately appreciate, likely supporting grain prices, ANZ Banking Group agricultural commodities strategist Scott Briggs said. However, as China is already a large buyer of commodities such as soy and soyoil, demand may grow at its own pace regardless of the exchange rate, he said.

 

China is the world's largest importer of soy, and, after a hiatus of several years, it has been importing corn since April to keep a check on local prices.

 

Traders and analysts said China is unlikely to make any drastic change in its currency policy soon, as this would hurt its exports, but Saturday's (Jun 19) announcement of a more-flexible exchange rate is a positive move.

 

"The issue is not about making the yuan's exchange rate flexible today or tomorrow, but China's attitude towards the currency system, which seems to be changing," Genichiro Higaki, head of proprietary fund management at Sumitomo Corp in Japan, said.

 

He said plans for a stronger yuan are supporting several asset classes, including commodities such as grains, because it will increase the purchasing power of importers.

 

Given China's voracious appetite for commodities, the prospect of cheaper, more competitive exports to the country is driving up prices, a Singapore-based commodities analyst said.

 

Actual strengthening of the yuan on a sustained basis will be the next crucial factor for the markets, but a clear rising trend is unlikely to emerge today or tomorrow, Higaki said.

 

ANZ's Briggs said Monday's (Jun 21) rally in grain prices is not only due to the yuan, but also more market-specific factors such as the adverse weather in US grain planting regions.

 

Heavy rain has lashed the US Midwest and Canada's grain growing regions for more than a week, affecting ongoing spring planting.

 

Much of the bullish effect of the weather has already been factored in the current price, a Tokyo-based executive at a global trading company said. However, he said, a bumper crop will hinge on ample rain in August for soy and in July for corn.