Rural Voice Market Commentary – February 10, 2020

by: Scott Krakar

The grain markets continue to revolve around China and its need to source lots of product.  China continues to buy soy products, corn and ethanol from the US in massive volumes.  How massive are the volumes of these ag purchases?  In the case of soybeans they are likely to be record high.  China’s import of soys are expected to be in the 110 million tonne range.  This demand of course is fueled from the rebuilding of the swine herd in the nation, that was cut aggressively to prevent the African swine flu that swept across the nation.  This strong demand from China coincided with the late harvest in Brazil, in whom China would typically begin to source product from at this time of year.  Brazil, due to the drought that was experienced through the growing season, and then the subsequent rains that fell in areas where the crop was ready to harvest, prevented China from getting the timely shipments they were counting on.  From this, they had to come to the US to buy beans to fill the void.   Consequently the market rallied sharply.  So how far is Brazil behind on shipping beans versus expectations?  The numbers are staggering.  In January Brazil only exported 50,000mt of beans.  This compares to last January which saw exports of 1.4 million tons.  As February began the harvest their didn’t improve much with the weather continuing to cause harvest problems – and the back log at Brazilian ports continued to grow larger still.  At one point there were enough ships waiting to load a back log of a reported 10 million tonnes!

China is also shopping for ethanol.  The nation has indicated commitments to buy ethanol in the range of 200 million gallons, all for shipment in the first half of 2021.  If this occurs it will be their biggest purchase ever recorded.  To put this volume in context consider historical purchases.  In 2013 China bought about 23 million gallons, moving to progressively higher volumes until 2017 when they purchased just over 198 million gallons.  Therefore if this purchase pace is realized, their purchases on an annualized basis could be double the previous record imports.

China’s corn inventory is falling also.  A recent report by the UN Food and Agriculture Organization showed China’s corn inventory dropping 54 million tonnes to 139 million tonnes.  This in turn drops world ending stocks, as China carries a large volume of the worlds corn inventory.  From this report world ending stocks are estimated at about 230 million tonnes – with China holding about 60% of these world stocks.  These estimates put the world stocks to usage ratio to low levels not seen since the 2013/2014 season.  These updates are bullish for grain prices, however there could be further issues develop that could derail the market strength.

The African swine flu (ASF) outbreak that rampaged China’s hog herd for the past few years is reported to be spreading throughout the nation once again.  ASF is a highly contagious, high mortality disease within hogs.  China had been making good progress with this disease. They took large control measures and eradicated vast amounts of infected animals.  Once the virus was seemingly under control China was able to rapidly rebuild their swine herd; this herd rebuilding has helped fuel the strong upward momentum in grain prices to multi year highs.  Lots of pigs require lots of feed.  Stubbornly the disease may be circulating again, most likely caused by dubious vaccines that are not only ineffective, but that also spread the disease.  Long story short, there are live modified vaccines being used in China (illegally) that have been modified to be less virulent, but also infective; meaning the hogs are becoming infected from the “vaccine”.  It has been stated that hogs infected in this manner are asymptomatic (do not show symptoms) and therefore the disease spreads rapidly and undetected because this new variant is believed not to be clinical.  Will this disease infect widespread pig herds once again in China – or for that matter in other places in the world?  The ramifications to grain prices could be catastrophic if these fears are realized.  Chinese purchases of grain have brought the demand driven markets we are currently experiencing – lets hope this disease spread is rapidly mitigated and controlled.

Wheat markets are under pressure as Russian producers look to sell wheat before the Russian Government introduces its export tax later this year.  This has made Russia the cheap seller of grain once again in the old crop shipping season making the competition for old crop homes very competitive.  In a recent tender Egypt had over 1 million tonnes offer to it, highlighting the urgency seen to ship volume before the tax window begins.   The upcoming market tax does give Russian growers a great incentive to ship as much old crop wheat as possible, because the tax that will be levied is very steep.  Currently the government has stated that the tax will come into effect on June 1 and will be a 70% tax on any amount more than $200/mt!  As of this writing Russian wheat is offered at a main port location at about $290/mt.