AgriCensus Report

FACTBOX: What could be on China’s agriculture shopping list?

The US and China have for the past three months been locked in discussions about how to overcome a trade dispute that has slowed Chinese economic growth and seen the US-China trade balance slump to a record low last year.

Last month, Chinese imports from the US fell almost 20% compared to January, while its exports to the US fell 14.1%, indicating that the trade war is starting to bite almost a year on from when it started.

Over the weekend, Chinese officials from the ministry of commerce told journalists at an annual press conference they were working “day and night” to reach an agreement that would “remove all the tariffs imposed on each other” so that normal trade relations can resume.

So far much of the focus of the US administration has been on the so-called structural issues of intellectual property theft and an enforcement provision that China has refused to accept.

The main thrust from the US is how to address a trade balance with China that has ballooned from $268 billion a decade ago to a record $420 billion last year.

Bloomberg News last month reported China had pledged to buy an additional $30 billion worth of agricultural goods in an attempt to make a dent in to the trade balance and smooth the way for a trade deal.

The following is a factbox on what could be on China’s shopping list.

Soybeans

Soybeans is the jewel in the crown of US agricultural exports to China, although they have collapsed last year after China slapped a hefty 25% import tariff on US beans as part of the trade war.

Of $17 billion worth of US soybeans sold last year, China took just $3.1 billion, indicating that there is plenty of scope for this to increase by at least $10 billion to ensure exports returned to more historical 2016-2017 levels.

Any purchase above this would likely have to be done economically and come at the expense of Brazil – China’s biggest agricultural trading partner.

Wheat

The US has long since stopped being the marginal supplier of wheat to the world – losing that accolade to Russia.

Last year, the US exported $5.4 billion worth of wheat and just $100 million, or 400,000 mt, of that went to China, although that was particularly low last year.

US wheat sales to China have averaged around 1.5 million mt over the last five years.

If rumours that China could up that to as much as 7 million mt per prove correct, it would mean almost doubling its annual wheat imports but would still only make a $1.5bn dent in the trade deficit.

Corn/ethanol/DDGS

The US is a huge exporter of corn, selling 70 million mt or $12.5 billion of the grain on to the international markets last year.

However, China – itself a massive corn producer – has picked up just $50 million worth of that, raising expectations in the US that corn could be a big beneficiary of any trade deal.

However, ethanol and the animal feed Distiller’s grains (DDGS) would make for a more logical export target.

The US exports around $2.7 billion (6.5 billion litres) of ethanol each year with about 3% of that going to China.

It also exports around 12 million mt of DDGS each year worth around $2.5 billion.

In 2016 China took around 20% of that volume, but that has since collapsed to just 2%.

Ethanol probably makes the biggest sense, given China’s domestic target to blend 10% of the nation’s surging fuel demand with the alcohol.

While DDGS demand is likely to suffer in the wake of the African swine fever outbreak, China’s US ethanol imports have numbered over 200 million gallons in the past, a figure that could only increase as the E10 programme is rolled out more widely.

However, with China also intent on building its own domestic ethanol production capacity, any trade solution that includes ethanol exports could provide a short term fix and a longer term flashpoint.

Sorghum

The US exported around 4 million mt of sorghum, worth around $836 million last year and China took around 60% of this volume.

But the US has the potential to export double this volume.

In 2016, it exported 6.9 million mt worth $1.4 billion.

Meat

US exports of beef, pork and chicken totalled $18.2 billion last year, with beef accounting for $8 billion, pork $6 billion and chicken at $4.2 billion.

Of this, about $1.1 billion worth was exported to China, with beef exports amounting to $80 million, pork about $600 million and chicken $420 million.

However, with the ongoing outbreak of swine fever in China slashing the size of the hog herd there, most observers see a trade deal potentially triggering a huge rise in meat exports.

Sources in Spain and the US have already confirmed that Chinese buyers have been scoping the European and US market out for more pork imports as most analysts expect pork prices to soar in Q4.

Last week, Chinese forecasters JCI said they expected the size of the hog herd to fall by at least 10% – at least 40 million pigs, due to the infectious disease.

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Australia inks trade deal with Indonesia to consolidate grain supply

The signing of the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) on Monday in Jakarta is likely to consolidate Australia’s position as a principle grains supplier to one of the most populous nations on earth.

The deal was signed by Australia’s trade minister, Simon Birmingham, and his Indonesian opposite, Enggartiasto Lukita, and now heads back to the respective parliaments for final approval.

It comes after a drawn out negotiating process stretching back to 2010.

Indonesia is the second largest wheat importer in the world, and Australia’s biggest wheat customer, according to a report from Rabobank. Indonesia takes 20% of Australia’s exports with the free trade deal coming as trade relations between the government in Canberra and their counterparts in Beijing have deteriorated in recent months.

“Amidst global trade tensions and uncertainty regarding Australia’s barley trade with China, the signing of the… agreement in Jakarta yesterday is great news for Australian grains,” said Rabobank’s senior grains and oilseeds analyst Cheryl Kalisch Gordon.

The IA-CEPA agreement includes a 500,000 mt feed grain export quota for Australian feed wheat, barley and sorghum, which has the provision to grow unfettered by 5% per year and could prove to be valuable according to market sources.

“There won’t be a significant improvement (from the current arrangement), but if the Indonesian government moves to restrict feed wheat, then the allocation will be very valuable,” one Australia-based market source said.

Indonesia recently imposed a stringent phytosanitary regime on Ukrainian feed wheat imports, while Russian wheat has also fallen foul of the country’s standards.

But at the same time Indonesia has increased the wheat import from Argentina from 620,000 mt last year to 1.6 million mt this season, becoming the second biggest importer for that origin after Brazil, making harder competition for Australia.

Australia already has the option to export milling wheat into Indonesia at a zero duty rate, versus 5% imposed on other exporters, but Indonesia typically bans the import of barley, wheat and sorghum for feed purposes.

The agreement also makes provision for a joint grains market development initiative intended to develop the Indonesia-Australia supply route.

“These provisions offer important avenues to… compete more strongly with cheaper Black Sea or Argentinian origin wheat, which may have been used for feed (even though imported as milling),” Gordon said in an emailed statement.

While Indonesia hasn’t typically used sorghum or barley – the subject of China’s ire in its Australian anti-dumping investigation – in its feed mix, the agreement may encourage some outlet, according to the market source.

“Maybe it opens up Australia barley and sorghum into Indonesia when it prices competitively versus wheat into the feed ration,” the source said.

Finally, the agreement also includes eliminating tariffs on frozen beef, potentially boosting domestic Australian feed demand. 

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Macron promises greater farmer protection from overseas ‘threat’

French President Emmanuel Macron has promised to protect EU farmers from overseas competition, using a speech Saturday to call for an increase to the European Union’s Common Agricultural Policy (CAP) budget despite the impact of Brexit on its finances.

Macron called for the EU to pursue an “ambitious” Common Agricultural Policy (CAP), vowing that its budget would not be reduced as a result of the UK leaving.

CAP negotiations remain underway, with its policies and budget for 2021-2027 expected to be announced by June.

The CAP currently accounts for about 40% of the EU’s budget – or around €58 billion a year – with France the single biggest recipient, taking about 15% of that pot.

But the departure of the UK from the EU sheduled for March 29 has threatened to blow a hole in the EU’s finances, with an expected shortfall of €12-14 billion a year splitting member states, some of which have been hoping to cut their contributions.

External threats

Calling for EU unity on the issue, Macron said “the real risk facing our agriculture is not … competition between European states,” instead warning the bloc is threatened “from the outside by great powers that … consider food a commodity”.

“Today French wheat is competing on the world market with Russian or Ukrainian wheat, produced on farms of thousands of hectares, ten times larger than the largest of our farms,” Macron said.

While France’s wheat sales have managed to hold up this year, the wider EU has plummeted 20% after a poor harvest left exporters struggling to compete with lower-cost producers after a poor harvest.

And longer-term, the EU has lost market share in some of its traditional buyers as Black Sea producers have boosted production.

Macron urged the development of higher quality wheat in order to differentiate itself from, and to compete wit,h Russian and Ukrainian exports, as well as boosting its ties with Africa as a destination market.

Macron also spoke of the need for a “red line” in the EU’s trade negotiations with the US on agriculture, calling for “food sovereignty” and warning that importing genetically modified soybeans leaves EU livestock and poultry at the mercy of price volatility.

Macron’s struck a similar tone to that of European Commission President Jean-Claude Juncker, who warned last week that the EU’s increased soybean imports from the US would be under threat if meaningful progress in trade talks could not be made.

Brussels has been at pains to keep agriculture off the table in ongoing trade negotiations with Washington, although the US has been pushing to open the EU market to its exporters.

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ANALYSIS: Iran’s corn need key as Brazil’s export, import flow up-ended

Brazil’s position as one of the few exporters prepared to run the gamut of US sanctions and supply corn to Iran is helping to upend the country’s export dynamics, as geopolitics, trade fears and economics sees southern states exchange Brazilian corn for Argentine imports.

“The crazy thing is that ports in the states of Rio Grande do Sul and Santa Catarina are exporting corn this month – this is not normal at all,” one market source told Agricensus.

The news comes as the same states – which are home to a significant chunk of Brazil’s livestock sector – have imported corn from Argentina in recent days, in a move that often reflects Brazil’s high domestic prices and poor internal supply logistics.

“The state of Santa Catarina normally buys some corn from Argentina and Paraguay because those countries are close, because Santa Catarina needs more corn than it is able to grow and because it’s cheaper to buy corn from those countries,” Agrural’s Daniele Siqueira told Agricensus.

Santa Catarina is too far south to have a second safrinha crop, where much of Brazil’s corn supply comes from, but is too far away from the big producing states of Mato Grosso and Parana to make supply logistics cost effective.

While it is not unusual for Argentina to supply corn to Brazil, the fact that the states are also exporting corn draws together disparate threads of trade war, Iran sanctions, Argentina’s record-breaking crop and Brazil’s domestic situation.

Southern star

Line-up data for Brazil’s principle ports in Santa Catarina and Rio Grande do Sul – Rio Grande and Imbituba – shows nearly 650,000 mt of corn either loaded, loading or recently sailed.

“Farmers harvest soybeans later in those states and ports don’t have much to do right now… (but) they were not supposed to export corn, because their domestic market needs corn,” Siqueira said.

While the bulk is bound for Vietnam from Rio Grande, the port is also host to one cargo heading to the Middle East country, while Imbituba’s line-up is dominated by corn cargoes to Iran – with 197,122 mt set to sail.

Geopolitics

Which is where geopolitics kicks in – Iran has been increasingly reliant upon Brazilian corn supply since US president Donald Trump re-imposed sanctions on the country in December 2018.

That has seen some of the country’s auxiliary suppliers – countries such as Ukraine – show a degree of wariness about selling to Iran, fearing a backlash from the US.

That has consolidated Brazil’s position as the country’s number one corn supplier, and left Iran having to pay a substantial premium to secure supply.

“They are exporting to expensive destinations… the domestic market is equivalent to 120 cents over the March futures contract,” a second Brazil-based market source said.

That equates to around $194/mt, at a time when Argentina’s FOB Up River price stands at around $167.75/mt, according to Agricensus data – weighed down by expectations of a 46 million mt corn crop that is poised to come to market from March onwards.

While the financial reward is clear, the use of southern ports versus the typical main export hubs of Santos or Paranagua comes down in part to the timing of the soybean harvest and the ongoing strained trade relations between the US and China.

With Brazil’s soybeans are harvested as part of the country’s first crop, logistics typically switch towards soybeans at this time of the year – but China’s ongoing trade impasse with the US has added an extra incentive, and Brazil is gearing up for a big bean export performance.

Again, line-up data shows 89 ships are either waiting to load, loading or have recently sailed from Brazil’s main export hub of Santos.

Of these, only two are carrying corn, with 71 of the ships – some 80% – taking soybeans.

That leaves the southern states at a unique crossroads – meeting Iran’s supply needs through Brazil’s corn exports, while capitalising on competitive Argentine corn to meet its own needs. 

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EU to cash $70bn in from trade war, Brazil to benefit $10bn: UN

The European Union will profit the most from changes in global trade due to the US-China trade war, with Brazil cashing in $10.5 billion annually if the world’s two largest economies expand the trade war, a UN report published this week showed.

The study by the United Nations Conference on Trade and Development shows that the EU will benefit from $70 billion worth of increased trade, equivalent to 0.9% of the bloc’s total exports.

Of that headline figure, $50 billion will replace Chinese exports to the US, with $20 billion capturing US exports to China.

President Trump has warned that if no deal is reached by March 1, the additional tax rates on Chinese goods will increase from 10% to 25% with China to react reciprocally.

The UN estimates that of the $250 billion of Chinese exports taxed by the US, 82% will be snatched up by firms in third countries, with 12% to be retained by Chinese firms and just 6% by US companies.

Conversely, of the $110 billion of US exports taxed by China, 85% will go to other countries, with US firms holding on to 10%, and Chinese companies only seeing a 5% increase.

“The reason is simple: bilateral tariffs alter global competitiveness to the advantage of firms operating in countries not directly affected by them,” UNCTAD concluded.

The EU is able to step into the void as it is best placed to offer the goods and services at a competitive rate while having the economic capacity to do so.

“Our analysis shows that while bilateral tariffs are not very effective in protecting domestic firms, they are valid instruments to limit trade from the targeted country,” UNCTAD’s head of international trade division, Pamela Coke-Hamilton, said.

Brazilian beans

Brazil, who became China’s number one soybean supplier in 2018 following the trade war, will benefit to the tune of $10.5 billion, equivalent to a 3.8% increase in annual exports and making it the eight largest beneficiary from the trade war.

Yet, only 20% of that increase is due to Chinese tariffs on US goods, meaning that the largest benefits for Brazil are to be reaped from additional trade with the US, such as metals and machinery, rather than additional soybean sales to China.

While higher cash prices for soybeans were welcomed by Brazilian farmers, industry concerns remain over what will happen when the trade war ends and tariffs imposed on US beans are lifted.

“Because the magnitude and duration of tariffs is unclear, Brazilian producers have been reluctant to make investment decisions that may turn out to be unprofitable if the tariffs are revoked,” the study said.

In 2018, Brazil exported 69 million mt of soybeans to China worth $27.5 billion, up from $20.3 billion the year before, Brazilian customs data showed.

Mexico, Japan and Canada were other large beneficiaries, following the EU, and each captured more than $20 billion.

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ADM Q4 profits slump despite surging crush margins

Agribusiness major Archer Daniels Midland posted a 60% slump in profits in the fourth quarter of last year, falling from earnings per share of 139 cents in Q4 2017 to just 55 cents in Q4 2018.

ADM reported earnings per share of 88 cents on revenue of $15.95 billion for the fourth quarter last year, falling short of analyst estimates of 92 cents and $16.8 billion.

The results came despite soaring profits in its oilseeds and origination business, which more than doubled to $432 million from $201 million in the fourth quarter last year as the company cashed in on low soybean prices in the US and high global soymeal prices.

Lower revenues from the company’s origination business, which includes grain trading and handling, hit profits after China slapped a tax on US soybeans, seeing a collapse in trading volumes in the US.

“Looking forward, the crush environment in 2019 will not be as spectacular as 2018. Given global demand and the strength we have outside China this business will maintain crush margins well above average over the last five years,” Juan Luciano, ADM CEO, told investors Tuesday.

Operating profit in the company’s carbohydrate solutions business, which includes its biofuels production, fell 31% due to poor ethanol margins amid record US supply.

ADM has been investing downstream in the feed chain in an attempt to gain a foothold in higher margin businesses.

In terms of soybean crush margins, ADM said it had locked in gross margins of $30-35/mt at its crushing facilities in the US with high utilisation rates. Meanwhile, in canola, margins were in the region of $42-45/mt.

In terms of rapeseed crush in Europe, the company said meal replacement from China as well as good demand in Europe had kept meal prices high, leaving margins at around $35/mt.

Finally, in Brazil it said its crush facilities at ports had locked in margins of $10-15/mt and $25-30/mt gross margins at “facilities that are geared towards the domestic market”.

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Russia’s 2019/20 wheat production forecast at 67m mt: minister

Russia’s 2019/20 wheat production will come in at around 67 million mt at its current trajectory, which would be a fall of about 4% from last year’s output, the country’s agriculture minister said in a meeting Monday.

“We will probably have about 108-110 million mt (of grain) … We plan to collect around 67 million mt of wheat,” Minister of Agriculture, Dmitry Patrushev, told President Vladimir Putin in a meeting transcript released by the Kremlin on Monday.

When asked about the target for the 2018/19 season’s exports, Patrushev estimated total grain exports of 42 million mt with wheat contributing 36 million mt.

Patrushev stressed the goal of becoming an exporter of “high quality wheat”.

The meeting comes on the same day Russia’s agriculture ministry was due to publish its weekly grain export figures, although it was yet to publish at the time of writing.

The pace of wheat exports this marketing year has been controversial, with the government looking at informal ways of slowing sales that have raced ahead despite output falling by about 20% year-on-year.

The most recent data, published a week ago, put wheat exports 11% higher year-on-year at 25.3 million mt.

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Bunge cuts 2018 EBIT outlook on trade war, appoints new CEO

Bunge, one of the world’s biggest agribusiness companies, has cited the impact of the US-China trade war in lowering its income outlook for the full 2018 fiscal year ending in December, according to a statement released Tuesday.

The company rolled the revision into an announcement over the appointment of a new CEO, with current board member Gregory A. Heckman revealed as the acting CEO with immediate effect. 

Adjusted EBIT will fall by about $90-$100 million in the Agribusiness segment and $60-$70 million in the Sugar and Bioenergy segment, compared to the low end of its previous forecast which was $1.045 billion.

“The Agribusiness shortfall was largely due to the reduction in value of the company’s Brazilian soybean ownership as factors related to China trade and demand caused Brazilian prices to converge with US prices,” the company said.

“The Sugar and Bioenergy shortfall was primarily due to lower Brazilian ethanol prices, and a weather-related reduction in yields as a poor crop year came to a close.”

The New York-based agribusiness has been suffering from a global glut of grains and oilseeds in the past year, with its share price falling over 30% in the past year.

Despite the downward revision in its EBIT outlook, Bunge’s share price rose 1.5% Tuesday as the company also announced Heckman had replaced former CEO Soren Schroder who announced in December he was stepping down after five years in the role.

“I look forward to further collaboration with Kathi (Bunge’s Non-Executive Board Chair, Kathleen Hyle), the Board and our management team, focusing on ways to improve performance and create shareholder value,” Heckman said in response to his appointment.

At the end of October, Bunge – part of the industry’s ABCD quartet of agri-trading giants – agreed to add four directors to its board after pressure from investors to create a strategic review committee to examine the company’s operations.

Last year, the company became a takeover target for Glencore and rival agribusiness giant Archer Daniels Midland (ADM), but ADM’s CEO debunked that in a January interview with newswire Reuters saying it is the wrong time for “monster” acquisitions.

In the 2017 fiscal year, Bunge’s turnover rose 7.3% to $45.79 billion, resulting in a total EBIT of $436 million, down nearly 61% on the year, with 60% attributed to its Agribusiness segment, and with the Sugar and Bioenergy making a loss of $12 million.

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Brazil soybean exports slow as China demand, early harvest disappoints

Soybean exports out of Brazil in January will not reach 2 million mt, according to Agricensus calculations using export and line-up data.

Brazil exported just over 1 million mt of soybeans during the first two weeks in January with a further 800,000 mt in the line up data.

And while that will eclipse last year’s record of 1.5 million mt exported over the whole month, it does not reflect recent expectations that exports will be much higher due to an early harvest in Brazil’s southern states.

Sources say the trade war and the uncertain picture of Chinese demand has deterred buying of soybeans by private crushers, many of which have been impacted by negative crush margins.

Typically, Chinese crushers would buy US beans for January shipments to cover March crush, but with US imports taxed at 25%, US bean sales have been limited to state-sponsored purchases of 5 million mt, leaving a big question of what China will do for March supply.

“It depends how much of that (5 million mt) finds its ways to crushers,” said one soybean trader at an international trading house, adding that if much of it does trickle out then buying will remain muted.

Brazil remains the cheapest origin for Chinese crushers to buy beans, but trade has been “very quiet” for weeks, according to Brazilian and Chinese sources, with about 20 cargoes being bought since December.

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As trade talks kick-off, Sinograin, Cofco buy more US soybeans

After much speculation, Chinese state-owned entities returned to the market on Monday to buy US soybeans, purchasing up to 25 cargoes (900,000 mt), according to several market sources.

Just hours after trade talks between US and Chinese delegates kicked off in Beijing, several sources reported between 20-25 cargoes were bought by state-owned stockpiler Sinograin and Chinese agribusiness Cofco International.

The panamax-sized vessels were bought for loading January and February out of the US Gulf and some vessels loading February and March were heard loading out of the Pacific Northwest.

“The price is estimated at 148 cents per bushel FOB US Gulf over March futures,” said one trader, equating to $394/mt.

A second source said the price for US Gulf was “150 cents per bushel” with PNW cargoes 10 cents per bushel ($3.70/mt) cheaper.

While a third source said the price paid for beans off the Pacific Northwest for February and March loading was 142 cents per bushel over March futures ($392/mt).

Cofco and Sinograin were unavailable for comment.

If true this would be the third round of buying in the past month, with estimates that between 4 and 5 million mt have now been purchased.

In July, China slapped an additional 25% import tax on US soybeans in a retaliation for US taxing some of the nation’s technology exports – effectively blocking US suppliers from the world’s number one buyer of soybeans.

But after talks between President Xi and President Trump last month at the G20 summit in Buenos Aires, President Xi pledged to buy more US agricultural goods while negotiations to find a resolution to the trade spat were ongoing.

Chinese state-owned buyers had been rumoured to be in the market last week, but with a government shutdown in the US preventing the release of export data, the market will have to wait for exact details.

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