Global Grains Asia 2017: A thorough deconstruction of today's feed crop bear market
By ERIC J. BROOKS
Jean-Yves Chow, Mizuho Bank's senior vice president for Asia Financial Solutions, Food and Agriculture noted that everyone thought China would be producing nearly 240 million tonnes of feed by now, rather than the 188 million tonnes Alltech estimated it produced in 2016.
Chow deconstructed changes in Chinese livestock lines that led to this predicament. Hit by bird flu and a succession of food safety scandals, its declining poultry population is eating at least 10 million tonnes less feed than was expected. Similarly, poor profitability and rising pork imports reduced hog feed demand by 30 million tonnes. With hog inventories having fallen by 100 million head, Chow noted that the, "2.9 million tonnes of pork imported last year equals 10m of feed not produced."
All this brought China's annual feed output growth from its previous 10% annual pace to a virtual standstill for the last five years. It also made China's corn import volume only 1 to 3 million tonnes rather than the widely anticipated 15 million tonnes. This is a big part of the reason the golden grain languishes below US$4.00/bushel.
Chow also noted how the ending of China's corn growing subsidies was encouraging less growth of the former and more soybeans. Given the new resulting increase in domestic soy supplies, Chow asked, "Why not just keep importing soybeans, export soymeal to Southeast Asia, keep the soy oil and not import Southeast Asian palm oil? That would be a big game changer". At the same time, Chow made it that Southeast Asia will henceforth be the driver of world grain demand.
Chow was followed by Jiao Jian, COFCO Futures senior economist and deputy general manager. Noting that, "China's economic motor is in a state of change and adjustment", he explained how its transition to a consumer driven economy boosted demand for imported meats at the expense of feed grains. He was followed by Juhui Huang, BRF Asia's vice president of corporate affairs for Greater China. According to Juhui, China's early 2000s entry into the WTO turned it into a major food importer but it took a hierarchical approach in this matter, allowing unlimited oilseed imports but greatly restricting the quantity of foreign feed grain purchases.
The second day's emphasis on the state of world grain markets was opened by Consiliagra managing director Emily French, who asked why grains and oilseeds aren't priced even lower than they currently are. French gave two reasons. First, "The "The world is willing to pay production risk premium." Markets are willing to pay a higher price just to make sure there is enough around to mitigate future supply.
Second, we must subtract the portion of world inventories held by China, which are not publicly tradable. French notes, "China stores 44.5% of the world's wheat… that takes your supply cushion from 123 days to 81 days" Similarly, the world has in theory an 80 day inventory of corn. When China is removed from this calculation, "world corn inventories amounts to a much thinner 55 days of consumption."
Grains microeconomic woes also have a strong macroeconomic element to them: According to Micheal Every, Rabobank's Asia Pacific head of financial markets research, decelerating world demand is a symptom of a deteriorating, highly unstable global trading system. Under the world's current paper money based trading system, "the cost of its existence is that the US has to run a trade deficit, exporting dollars and jobs."
The American public has lost patience with this model but neither China or any other country is willing to become the new, import flooded center of the world economy. Noting that, "Globalization is a mile wide and an inch deep", he provided several alternative global economic models and potential war scenarios that could replace the current system, all of whom would profoundly alter world grain trade flows.
With paper currency-based grain trading comes the risk associated with exchanging paper assets for shiploads of the stuff. Towards this end, Ron Walcizek, director of OTC foreign exchange solutions Interational FCStone, reviewed grain hedging strategies that incorporate forward contracts, call and put options and interest rate swaps. Walcizek explained how they can be used to minimize trading risk or alternatively, leverage it into gains or losses that greatly exceed a grain contract's initial value. His presentation was complimented by that of Siavosh Arasteh, who explained how tools like cross platform data integration and real time port logisitics monitoring enables grain traders to exploit previously inaccessible arbitrage opportunities. Noting that, "the world is data rich but information poor, Arasteh concluded that, "You need to build your data, your understanding of these markets"
The second day's afternoon featured comprehensive reports on the state of supply, quality and logistical challenges faced by emerging grain suppliers in the Black Sea and South America. Lennart Andersen, director Arcevil SA explained how Argentina's recent economic liberalization is redefining its potential for supplying corn and soy to the world.
In contrast to Argentine political woes, Arthur Neto, branch manager for Brazil-based Alphamar focused on the serious logistical problems facing his country's overburdened roads, which suffer 50km traffic jams of soybean bearing trucks every harvest. He surveyed proposed northern railway and water shipping routes through potential soy growing interior regions, and their implications for the world market.
Similarly, Oleg Kryukovskiy, head of trading at GTCS Trading spoke of how short-term quality problems caused by bad weather could not stop Black Sea wheat and corn's rising quality standards. With grain quality rising, a panelist of Southeast Asian feed millers discussed how they are able to leverage rising quality and falling prices for alternative inputs like feed wheat in their formulations.
The third day opened with conference panelists discussing how to ride out this admittedly tought, deflated grain market. Moderator Emily French opined that with the Chinese boom's strongest days over, "We will probably never, ever see this kind of global growth again."
While French held out hope that an inflationary supply shock always comes along, not everyone concurred. Luke Mason, Head of Asian Grain Trading, Concordia Trading advised that "There's no real potential upside. If we have another good crop this season, we will probably have low prices for two or three years." Mason also advised that with South Asia transitioning from net exporter to importer, "We look to India as it is the biggest swing factor.The Indian subcontinent is going to be the most interesting market over the next five years."
Mason's statement essentially summed it up: China, world grain's biggest customer has satisfied its apetite. Everyone is hoping that India, Southeast Asia or a combination thereof will soon take its place. The news was not entirely good but as is always the case with Global Grains Asia, its analysis and quality of speakers was second to none. We look forward to next year's edition.
Date: March 13 - 15, 2017
Venue: Ritz-Carlton, Singapore
Organiser: Global Grain Events
Tel: + 44 (0) 20 7779 7222
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