AgriCensus Report

China ag futures spike as food shortage concerns mount

30 Mar 2020 | Johnny Huang

Domestic futures in China ranging from soymeal to palm oil all jumped on Monday as traders built positions on growing concerns of a potential food supply shortage amid the ongoing coronavirus epidemic.

Agricultural futures for the soybean complex and corn and palm oil listed on Dalian Commodity Exchange and those for the rapeseed complex and wheat and sugar on Zhengzhou Commodity Exchange all rose on Monday to their highest level in recent weeks.

“People were rumouring all types of issues in South America, suggesting that there could food shortage [in China]… Domestic agricultural sector was very excited today,” one China-based futures trader said.

Commodities that China imports a large amount of were leading the rally with soybean futures gaining 2-5% through the curve from last Friday’s close followed by soymeal, soyoil, rapeseed meal and oil, palm oil that jumped 1-3% across the board.

China imports around 85-90 million mt of soybeans a year mainly from Brazil and the US, accounting for more than half of total soybean imports globally.

Market participants have been circulating reports of potential disruptions to inland and port logistics in the US, Brazil and Argentina as more coronavirus cases were reported, as well as the cessation of palm oil production in Malaysia.

Supplies for China’s major agricultural imports, including soybeans and palm oil, could face a supply shortage if such disruptions occur.

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ANALYSIS: Covid-19 responses test limits of globalism and food security

20 Mar 2020 | Tom Houghton, Rei Geyssens

With governments around the world ratcheting up measures intended to control the spread of Covid-19, hastily implemented policies have started to show up the fragility of globalist policies that the agriculture trade has come to rely on.

Farming lobbies around the world have petitioned governments this week to ease emergency travel restrictions, warning that shortages of the cheap migrant labour the industry has come to rely on threatening food supply chains.

At the same time, some governments have hinted that they may be looking to step up barriers, limiting trade should export volumes be deemed a threat to domestic food security.

As the system starts to show signs of fraying around the edges, Agricensus looks at some of the debates that have emerged in recent weeks and look set to persist over the coming months.

Seasonal labour

Midweek, the US and Canada took the unprecedented step of closing their borders to all non-essential travel in a bid to curb the spread of Covid-19.

“We will be, by mutual consent, temporarily closing our Northern Border with Canada to non-essential traffic,” US President Trump tweeted, adding that trade flows across the border will not be impacted.

Aghast, the Canadian agricultural sector called on its government in response to the new regulation to keep the border open for temporary foreign workers on which its industry heavily relies, needing an estimated 60,000 workers annually.

“Most of the temporary foreign workers hired for grain farming bring expertise and experience which has been in short supply in rural areas,” the Western Canadian Wheat Growers (WCWG) said in a statement.

“The challenge is that many remote grain farms cannot operate without Temporary Foreign Workers as a part of their crew. The importance of our food value chain cannot be under-estimated for both our domestic or international markets,” said Kenton Possberg, WCWG’s Saskatchewan Director.

With the grain seeding season just about to start a limit in seasonal workers could delay the sowing of Canada’s 2020/21 cereal crops.

The association said that the self-isolation measures should continue to be in place for seasonal workers but that they should be able to work across borders.

Around the world

Similar statements have been issued around the world.

In Europe, a consortium of German farmers’ unions warned Wednesday that without short-term liberalisation of recent emergency restrictions, fresh produce growers will face

“Fruit and vegetable growers who rely on foreign seasonal workers are currently particularly affected,” the statement said.

And with queues up to 50 kilometres long forming at checkpoints along the continent’s internal borders, questions are also being asked about the viability of the EU’s commitment to the free movement of goods.

Pan-European food and farming lobby Copa-Cogeca warned Thursday that its “ability to provide food for all will depend on the preservation of the EU Single Market”.

That trend has not been universal, however.

Malaysia’s government succumbed to industry pressure on Wednesday, reversing a previous ban on palm oil plantation work as the sector was deemed an essential part of the country’s economy.

Port of call

An Agricensus report from earlier in the week demonstrated the piecemeal attitude in place around the world with regards to port control, with shipping agencies left scrambling to keep track of policies – often devolved to municipal or even company level – that can change by the hour.

Perhaps the starkest example this week has been that of Argentina – with ports left to their own devices flip-flopping on what would and would not be allowed to enter their terminals.

With the local market already thrown into disarray, port workers threatened to take measures into their own hands – announcing strikes over unsafe working conditions – before the government eventually stepped in late Thursday to close the borders.

Taps off

A further risk to global supply chains comes in the shape of some leaders seeking to reassure their domestic audiences that food shortages will not happen.

Earlier this week, both Ukraine and Russia’s leaders made comments that they would consider closing borders to exports trade if they saw a threat to domestic supply.

Ukraine will look to limit food exports if necessary, Ukrainian President Volodymyr Zelensky said in an emergency address to the nation on Monday.

“Senior officials” subsequently told local media that the as-yet-unpublished list would not affect grain exports, with little more on the subject said over the week as the comments were lost in a deluge of public health announcements.

And a similar comment came from neighbouring Russia on Tuesday, where the government sought to assuage fears of food shortages exacerbated by its hefty export programme.

“We are ready to introduce restrictions on the export of essential foodstuffs if stocks are not enough and such a need arises to meet the needs of the domestic market,” Deputy Prime Minister Andrei Belousov told an emergency government meeting on Tuesday.

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Malaysian Covid-19 lockdown likely to hit palm oil sector

23 hours ago | Rei Geyssens

The two-week movement restriction in Malaysia ordered by the Prime Minister on Monday evening could spell disaster for the palm oil industry in the world’s second-largest producing nation.

The movement control order is meant to halt the spread of the novel coronavirus Covid-19, but will stop workers from entering palm plantations as the sector is not considered as an essential service under the current order.

“We are taking the necessary safety measures in line with Malaysian Government’s Movement Control Order,” the Malaysian Palm Oil Council said on Twitter as it plans to close its offices until the end of March.

Malaysian Prime Minister Muhyiddin Yassin ordered the nation to limit non-essential operations and bar foreigners from entering the country for a two-week period which will enter into force on March 18.

Meanwhile, the Malaysian Palm Oil Association continued to lobby its government to exempt the palm oil industry.

“The Malaysian Palm Oil Association is appealing the government to allow plantations and refineries to operate during the restriction movement order in view of its importance to the national economy,” the association said in a statement on Tuesday.

The Malaysian palm oil industry is at risk of losing out on producing and deliveries as well as lose new palm oil business to number one producer Indonesia.

The worries about a potential crackdown on logistics in the palm oil sector lifted Malaysian palm oil futures after Monday’s slump, as the May contract closed 1.4% higher at MYR2,250/mt ($517.48/mt).

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China’s soymeal, rapeseed meal futures soar on ASF vaccine report

2 Mar 2020 | Johnny Huang

Soymeal and rapeseed futures in China rallied sharply on Monday, as the market responded to an academic report detailing the successful test of a potential vaccine for African swine fever (ASF).

A medical team at the Chinese Academy of Agricultural Sciences (CAAS) successfully trialled the ASF vaccine, releasing its findings in a research paper published in Science China’s journal.

“Our study shows that HLJ/-18-7GD is a safe and effective vaccine against ASF, and as such is expected to play an important role in controlling the spread of ASF,” the paper said.

The virus has killed million of hogs in China since August 2018, when it was first identified, and spread rapidly to claim the millions more hogs in neighbouring Vietnam before spreading further afield.

The report was enough to drive both soymeal and rapeseed meal futures – key sources of protein in animal feed – to reach a multi-month high on Monday.

The most liquid soymeal futures on the Dalian Commodity Exchange surged nearly 4% from the Friday close to hit a two-month higher of CNY2,719/mt ($390.66/mt).

For rapeseed meal, the most active future on the Zhengzhou Commodity Exchange jumped to its highest level in four months at CNY2,370/mt ($340.52/mt).

“These facts demonstrate that ASF cannot be controlled by culling infected pigs alone, and the development and application of an efficacious vaccine is urgently needed,” the paper added.

However, the rollout and use of such a vaccine across the market remains a long way off, with researchers emphasising that it is early days and there remains uncertainty ahead.

“The media had a misleading interpretation of the results,” said Zhu Zengyong, a researcher from CAAS, referring to the early media coverage that accompanied the first reports of the vaccine.

“The research and application of vaccine still has uncertainty in the future,” Zhu said.

Many market sources also believe that the rally lacks strong fundamental support.

“The rally was started by the vaccine rumour, but it was then dismissed. There were repercussions from equity and commodity markets today, along with a correction of crush margins,” said an analyst at a major Chinese crusher.

“The bullish trend today was not reasonable. It exceeded expectations,” one soymeal purchasing manager told Agricensus, adding that low soybean vessel arrivals and decent physical soymeal demand may have supported the futures.

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OPINION: Will China purchase more US ag goods?

14 Feb 2020 | Jonathan Kingsman

It is still too early to tell how badly – and for how long – the Coronavirus outbreak will affect the Chinese economy. But even before the virus hit, many grain traders were questioning whether China would, or could, honour the obligations made under the recently negotiated Phase One trade deal to increase purchases of American agricultural products. 

The conventional wisdom is that the trade wars will have a lasting negative effect on the US agricultural sector.  Observers compare the current situation to the two successive US grain export embargoes imposed by the Carter and Nixon administrations. As a result of those embargoes, the Japanese – at that time the biggest buyers of US soybeans – realised that they could not rely on the US and invested in South America to develop soybean production there. 

There is a strong argument to be made that history will repeat itself, and that China will reduce, rather than increase, its agricultural purchases from the US as it seeks to diversify supply. However, there are two counter arguments.

The first is that China’s diversification options are limited, at least as far as soybeans are concerned. Although genetic modification has allowed soybeans to be grown in a wider geographical area, Brazil and the US still dominate global exports with 77 million and 49 million tonnes respectively in 2018/19. The remaining 25 million tonnes of global exports were divided among just five other countries. 

It will be difficult in the short to medium term for China to diversify away from Brazil and the US. China could take a strategic decision to import an even greater percentage of their needs from Brazil, but this would further increase their dependence on Brazil.

The second argument is that it was the Chinese who imposed tariffs on US agricultural imports; the US did not embargo, or tax, exports. This is an important distinction. The Chinese government imposed tariffs as a bargaining tool in the trade negotiations—one of the few bargaining tools that they had. 

If the Chinese were now to reduce US imports they would not only be seen as unreliable and untrustworthy, they would also reduce their bargaining power in future trade negotiations. There is a wider trade picture to consider outside of agriculture.

This is not to say that US farmers should necessarily expect a rapid increase in their exports to China. It may take a while before soybean exports get back to the record of nearly 59 million tonnes shipped in 2016/17. 

Just five years ago traders were expecting that China would by now be importing 100 million tonnes of soybeans per year. African Swine Fever and the Coronavirus knocked the wind out of those demand growth estimates. It will take a while before demand recovers. 

But recover it will.  There has been some fear expressed that Chinese soybean imports have peaked. However, the Chinese middle class will continue to grow in both size and wealth. Their appetite for meat will grow with it, as too will soybean imports. 

But what about other agricultural imports? 

Alarm bells were rung recently when it emerged that China had bought about one million tonnes of wheat under their tariff rate quota from Australia, Canada and France, rather than from the US. However, this may actually be good news if it is a sign that China intends to follow a recent WTO ruling to reallocate unused import quota tonnages.

Corn and ethanol may be harder nuts to crack. Although China has signalled its intention to increase ethanol use, the country is unlikely to import significant quantities to achieve that end. As for corn the US, along with Argentina and Brazil, face growing competition from the Black Sea region. Ukraine has expanded production and has the potential to grow further. This should not be underestimated.

Ultimately it will come down to a question of price. The extent to which the US will participate in renewed Chinese import demand growth will depend on the competitiveness of US farmers. Politics are important in the grain trade, but price is even more so.

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