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Soaring freight rates force Brazil soybean sellers to lower offers

Declining supply of iron ore from Australia and rampant Chinese steel production has seen demand for freight from Brazil to China rise again over the past week, market sources said Tuesday, a dynamic that is forcing soybean sellers to offer more aggressively in the marketplace.

Offers for soybeans for August shipment out of Paranagua fell from 95 c/bu on Friday to 85 c/bu over August futures on Tuesday at time of press.

With August futures falling 23 c/bu over the same period, soybeans loading out of Paranagua next month have fallen a chunky $12/mt on a flat price basis to $359/mt.

“The fact that freight prices rose and demand is not so aggressive means that though sellers are reluctant to let go of their beans, buyers are not in a position to offer better prices,” Steve Cachia, an analyst with Brazil brokerage Cerealpar told Agricensus.

Freight from Santos to North China has risen $7/mt to almost $40/mt in August in just two weeks, a rise of more than 20%, several sources said Tuesday, quoting $39.50/mt and $39.75/mt on the route.

The dynamic is being driven by a huge year-on-year jump in steel production in China that has dovetailed with shrinking supply from Australia – the number one iron ore exporter ahead of Brazil.

Rio Tinto – the world’s largest iron ore exporting company – shipped 156 million mt of ore from Western Australia in the first half of the year, down 8% on the year and the lowest volume since 2017.

Meanwhile, China’s national bureau of statistics reported this week that steel production was up 10% in the past six months, despite a slowing economy.

With iron ore, grains and soybeans all being shipped in the same type of vessels, a shortage of capesize vessels (150,000 mt) has led to iron ore sellers sourcing panamax size vessels instead.

In turn, that has forced freight rates up on the popular East Coast South America to North China route and forced wheat sellers in the Black Sea to source vessels from as far as the Arabian Gulf.

“There is a huge increase in freight rates in the whole Atlantic. For some supramax/ultra grain trades to Far East routes rates have increased by $9-10/mt in the last month,” said one freight broker who declined to be named.

“The market is super-hot in the Atlantic and that’s true. After Vale alleviated some issues they had with their tailings dams, iron ore exports from Brazil increased considerably,” said a second source in the freight market.

Yet while the soybean market is feeling the pinch, offers out of Brazil have largely been unchanged at around 30 c/bu over September and December futures for shipment in the next three months.

“Brazilian books are well-covered until September, so I think there shouldn’t be a reason for premiums to come off hard in Brazil,” said one market source in Brazil.

The Baltic Dry Index, which tracks the cost of shipping bulk commodities across a variety of vessels and routes, hit 2,011 points Tuesday, up 83 points on the day to reach the highest level since January 2014.

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‘Use it or lose it’ ports tell Russian grain exporters as shakeup continues

Some of Russia’s biggest grain export terminals have introduced take or pay schemes for customers to boost export volumes, market sources told Agricensus on Thursday, putting additional pressure on traders as the shakeup of the industry continues into the new marketing year.

Under the new setup, quota holders that do not use their port allocation face stiff penalties that add an extra dimension to the challenges already facing grain traders, potentially complicating matters when origination in the inland market slows or export demand dries up.

“When you sign take or pay you get a reduced rail tariff … If you do 90% of the volume you are good, if not there is $10/mt penalty,” a trader told Agricensus on Thursday.

“They want to boost traffic through the terminal, as traders stock up on grain volumes and sit around waiting for a good price,” a broker said.

Ports that have introduced the charges this year include NZT, NKHP, and TCSP, which account for around 12 million mt of annual grain handling capacity.

Agricensus contacted the ports’ owners for comment, but had received none at the time of press.

NZT was recently acquired by state-owned lender VTB, which has been buying up assets across the Russian grain market in recent months.

VTB also owns a 33% stake in the NKHP terminal.

The take or pay arrangement at Russia’s deep water ports is one of several issues set to change the shape of grain exports this year.

Authorities started to tighten control over the industry last year as soaring wheat export volumes pushed prices in the domestic market higher, with the knock-on effect increasing bread prices across the country.

Health and safety controls at smaller ports were stepped up, with the new inspection regime helping to ebb the flow from Russia’s Azov Sea ports and redirecting traffic to deep water terminals on the Black Sea.

Truckers were also targeted as part of the shakeup, with axel load limits increasingly enforced to stem grain arrivals at ports.

Grain handlers will often overload trucks in order to maximise margins on journeys, particularly during harvest as supply swells.

And exporters themselves have also reorganised, with a new industry body launched in April to coordinate policy and increase information sharing between trade houses and the government.

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Bids for Brazilian soybeans fall on China US purchase rumours

Basis bids for soybeans loading out of Brazilian ports next month fell by about 10 c/bu ($2/mt) in trade on Monday as rumours that Chinese state-owned buyers may pick up new crop US beans circulated the market and offset a stronger real.

Bids for beans loading in Paranagua port next month fell from 95 c/bu over August futures on Friday to 85 c/bu on Monday, despite soybean futures flatlining and a stronger real.

Typically a stronger real would result in firmer premiums.

“There are rumours China is supposed to buy new crop US soybeans this week,” said one source in Brazil.

“You choose what to believe, but what we hear is the Chinese SOEs (state-owned enterprises) will be buying new crop beans this week,” said a second source.

On Saturday, President Trump said that China has agreed that it will buy “large amounts” of agricultural products from the US in return for delaying the implementation of new tariffs on Chinese goods imported to the US.

Tweeting from Osaka, Trump said that talks to restart negotiations had gone “far better than expected,” but was vague on the volume and type of agricultural goods that he thought China would buy.

Chinese officials have not confirmed the statement.

Typically, Brazilian soybeans compete with US beans for Chinese market share, although the imposition of a 25% import tariff on US beans has meant that the only buyers for US beans in China are Cofco and Sinograin, who avoid the tariff as they are state-owned.

China has agreed to buy 20 million mt of US soybeans, but has so far contracted just 14 million mt.

Brazil cash prices for soybeans loading in August are currently at a $19/mt premium over those from the US Gulf, when freight is around $10/mt cheaper and Brazilian soybeans normally attract a $4-7/mt premium.

“I didn’t hear the rumour, but I don’t doubt it, after all US beans are cheaper, right?” said a third source.

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Persian Gulf grain cargoes hit by vessel war risk premium

Grain cargoes travelling to the Persian Gulf have been caught up in heightened Middle Eastern political tensions, with the cost of voyages to the region rising as shippers increase their risk premium for travelling to the region.

The cost of shipping a panamax of barley from Ukraine’s deepwater ports to the Persian Gulf has increased $1.50/mt over the past week to $28-29/mt, according to freight analytical agency ISM.

That increase was on show at SAGO’s barley tender that closed over the weekend, with average delivered costs to Saudi Arabia’s Gulf ports almost $11.50/mt higher than its Red Sea ports, up from $8.50/mt at its tender six weeks before.

The increase comes after attacks on two civilian oil tankers on June 13 in the Strait of Hormuz and a month after a similar attack on a vessel off the coast of Fujairah.

The US blamed Iran for the June attack – a charge the country’s government denies – with tensions between Washington and Tehran ratchetting up as result.

As a result of the increased geopolitical risk in the region, shippers are increasing their costs or outright refusing to travel to the region.

At least part of the cost comes from higher insurance premiums, with the cost of insuring a panamax cargo heading to the region now at $80,000-100,000 according to ISM.

“As a result of increasing tension in the Persian Gulf area following recent attacks on two tankers, War Risk underwriters are charging additional premiums (AP) for calls to the Arabian Gulf/Gulf of Oman,” shipping association Bimco announced last week to members.

“Some underwriters are charging a flat rate for all tonnage operating in the area, while others are differentiating based on the type of tonnage, flag and port of call,” Bimco said.

Cargoes traveling to the Persian Gulf had been subject to an additional war insurance premium prior to the June 13 attack, although sources told Agricensus that all vessels travelling to the Arabian Peninsula may now be subject to this cost.

Bloomberg reported on Monday that the cost of insuring oil cargoes traversing the Strait of Hormuz has increased tenfold since the start of the year.

An additional factor is ship owners’ unwillingness to send vessels to an area where civilian vessels have been targeted by attacks in recent weeks.

“(The premium) is in place because there are (fewer) ships willing to go there … You have to pay extra to secure an owner’s interest,” a freight broker to Agricensus on Tuesday.

While attacks on civilian vessels in the region have focussed on higher value, more symbolic oil cargoes, dry bulk traffic has also been targeted.

In May 2018, a Turkish-flagged vessel carrying Russian wheat was struck by a missile off the coast of Yemen.

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China July soybean imports to surge 19% YoY: analysts

China’s soybean imports in July 2019 are expected to rise almost 20% compared with the same month in 2018 as shipments from Argentina are expected to recover, polled data from China-based market sources showed.

Agricensus surveyed eight market sources in China that gave a range of between 8.5-10 million mt with an average estimate of 9.54 million mt.

Of that, 1.5 million mt is expected to come from the US and the same figure from Argentina.

In July 2018, China imported 8.01 million mt of soybeans with just under 300,000 mt coming from Argentina.

July imports in 2019 are also expected to jump more than 10% compared to the June estimate.

Analysts and traders expect China’s June imports to reach an average of 8.63 million mt, up more than 17% on the 7.36 million mt the country imported in May, but down marginally on the 8.7 million mt imported in June 2018.

The range for June import estimates was between 7 million mt and 10 million mt.

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VTB to buy Russian grain trader to expand state-control in grains: sources

Russian state-owned bank VTB has continued its grain acquisition spree, picking up trader Mirogroup for an undisclosed fee, sources close to the deal said Friday.

Mirogroup is among Russia’s biggest domestic grain traders, handling almost 2 million mt of grain in the 2017/18 marketing year.

Agricensus contacted VTB and Mirogroup for comment, but had received none at the time of press.

The acquisition is the latest example of the bank making inroads into the grain export industry, with Russia the world’s biggest exporter of wheat.

VTB has been on a buying run in the grains market this year, picking up logistics and storage assets since acquiring half of trader OZK from Summa Group as part of a bankruptcy settlement.

Last week it was confirmed the bank had bought a controlling stake in the country’s main grain-handling railway company.

And it is currently mulling buying into the grain handling hub at Taman, which would add to its control of two terminals at Russia’s main grain export hub in Novorossiysk.

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China-owned, US pork producer imports corn as US pork sales to China soar

Chinese-owned US pork producer Smithfield is snapping up cargoes of cheap South American corn over fears that immediate logistic woes and worries over the 2019/20 new corn crop may choke supply, market sources told Agricensus this week.

The news comes as US export sales of pork to China soar more than 1000% year-on-year as the world’s biggest pork consuming nation battles with its own supply woes amid an outbreak of African swine fever that is set to cut the nation’s pig herd by 30%.

US net pork sales to China totalled almost 40,000 mt this week, USDA data showed Friday, leaving the total commitment this marketing year at 234,000 mt so far.

That compares with just 20,000 mt at this point last year.

“Smithfield has bought cargoes from Santos loading and are looking for some more for shipment into North Carolina,” one market source said.

The result means that a Chinese-owned, US-based pork producer could feed pigs with cheap South American corn to help facilitate pork exports to China.

All at the same time as the US and China are locked in a trade war that is impacting the global agricultural markets and hitting US farmer incomes.

Big pig producer

US-based Smithfield is the largest pig and pork producer in the world with the move coming after rumours that corn sourced from Argentina had also been moved to the US state, which is on the country’s eastern seaboard.

“Argentina corn was reported to Wilmington (North Carolina). Brazil, I know it has sold four 2019 cargoes and another two for 2020,” an Argentina-based source said.

Smithfield operates the largest pork processing facility in the world, capable of handling 35,000 pigs a day, at Tar Heels in North Carolina, approximately 100 kilometres northwest of the port of Wilmington.

Although US-based, the company is owned by China’s WH Group following its acquisition in October 2018.

Argentina-based market sources mulled whether the impact of corn planting fears is weighing on domestic end users.

“I think that corn end users in the US are worried on physical corn… This smoke makes me think that there is a big fire somewhere. Do they expect a big impact on yields?” a third source said.

US corn futures and cash prices have been forced higher as a seemingly bottomless cocktail of rain and floods has swamped fields, prevented planting, and played havoc with logistics.

“I have never heard (of Smithfield buying in South America) … but as I have heard it’s due to the cost of bringing down corn from the Midwest… so I guess Mississippi’s flooding is enabling this trade,” the first source said.

US Gulf FOB prices reached $198/mt on Thursday, putting them close to $30/mt above the Argentina FOB Up River market.

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Cofco, Sinograin snap up South American soybeans as trade talks rot

Sinograin and Cofco have started to aggressively snap up South American soybean supply with at least eight cargoes being bought up from Argentina and Brazil in the past five days for nearby loading on fears that stocks could dwindle.

Five China-based market sources told Agicensus on Friday that the two-state-owned buyers had been sitting on their hands and avoiding contracting South American beans as they were waiting on a political signal to buy millions of tonnes of US soybeans.

However, last week’s breakdown of talks between the US and Chinese governments has dashed fears of a resolution that could reopen Chinese markets to US supply, and has thus changed that dynamic.

“Sinograin and Cofco resumed buying a large amount of South American beans recently because they had previously saved capacities hoping to buy US beans once the [trade] talks are done. Hence, they did not buy enough beans for front-months,” said one market source with knowledge of the matter.

China’s government had pledged to buy 20 million mt of US soybeans as a goodwill gesture to kickstart trade negotiations with the US.

But with only 12.5 million mt contracted – and a large part not expected to arrive until later than August – Cofco is now believed to be short beans.

“I heard they were forced to buy Brazil. The earliest vessel arrivals (if bought now) will be July 9th. Their supply could be cut out by the end of June,” said a second market source.

“Cofco apparently bought 4-5 cargoes on CFR basis on Thursday”, the same source added.

Cofco has been active in the market this week with several deals reported out of both Argentina and Brazil on both an FOB and a CIF basis – a dynamic that has seen Brazilian soybean prices rally 7% in the last week.

Out of Argentina, Cofco bought a cargo at 46 c/bu over futures on Thursday, equivalent to $325/mt and up 6% on the week.

While out of Brazil several deals were heard on a CFR basis at 177 c/bu over July futures for June loading and 6 cents higher for a cross month shipment for June/July equating to $373-375/mt CFR North China, also up 6% on the week.

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ANALYSIS: Are US soybean ending stocks too low at 995m bu?

Last Friday the USDA published its first pass at global production and supply of soybeans for the 2019/20 marketing year.

Record stocks this year and next are on the cards, with US soybean ending stocks this year expected to fall just short of 1 billion bushels at 995 million bushels.

That will feed into substantial ending stocks next year of 970 million bushels: and that comes out even with a chunky 5% fall in production slated for next year.

To put that figure into context it is more than three times the size of soybean stocks at the end of the 2016/17 marketing year – before the trade war started – and equivalent to almost six months of domestic use.

But given the report was written before the escalation of the trade war between China and the US, are even these massive figures too low?

Last Wednesday, China’s government said it would retaliate against President Trump’s plans to tax more Chinese imports and on Monday the ministry of finance announced a raft of new tariffs.

But beside those retaliatory measures, few traders think China will make good on its politically-motivated goodwill purchases of soybeans that have been booked and not shipped.

Out of the 20 million mt of US soybeans China said it would buy during previous negotiations, it has to date contracted to buy just 12.5 million mt, according to USDA figures.

Given US exports sales for the current marketing year stand at 45 million mt versus USDA estimates made before the escalation of the trade spat 48.3 million mt, the ending stock forecast doesn’t take into account too much additional demand.

But that likely doesn’t take into account the prospect of cancellations of those goodwill purchases.

Out of the 12.5 million mt that have been contracted, just 5 million mt has been shipped, leaving 7.5 million mt to load out of US ports in the next 16 weeks if the USDA’s forecast ending stocks of 995 million bu is to be reached.

“As far as I can see, there are almost no fresh trades for US corn or beans from June onwards,” a US-based market source told Agricensus.

Given that dynamic, should China pull the rug on the existing purchases it is very likely that the psychologically-significant level of 1 billion bushels in ending stocks could be reached.

Brazil to benefit?

China has bought 42 million mt of those beans from October through April, and with five months to go it is expected to take the same again, according to government forecasts published Friday.

With China’s National Grain and Oil Information Centre estimating May and June deliveries at 7.5 million mt and 8.5 million mt, respectively, 27 million mt will need to land between July and September if the import target of 85 million mt is to be reached.

With those delivery dates equating to May through July loading out of Brazil or the US Gulf, and with Brazil having exported just 25 million mt out of a 70 million mt projection so far, Brazilian farmers will easily be able to cater for additional Chinese supply.

On Friday, in anticipation of a spike in Brazilian demand, soybeans traded on an FOB basis at the port of Paranagua in a huge 100,000-mt clip.

“Huge volume on June,” said one market source.

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Grain handler The Andersons posts loss on bad weather, weak demand

US grain handling company The Andersons has announced a $14-million loss in the first quarter of the year compared with a $1.7 million loss a year earlier, as pre-tax income in the company’s Trade and Plant Nutrient groups weighed on earnings.

The company, which is divided into a Trade, Ethanol, Plant Nutrient and a Rail Group, said the report included an $8.7-million adjustment related to its purchase of the Lansing Trade Group, which tripled the size of the company’s grain business.

The company’s Trade Group, which comprises more than 50 grain terminals in 11 states across the US, posted a $5.9 million loss compared to a $1.2-million loss a year earlier, with the company saying weak domestic markets, foreign trade uncertainty and the floods in Nebraska took its toll on earnings.

“Income derived from grain originations and the group’s assets was down slightly on limited farmer selling and diminished income from storing wheat; those results also included a $2.2 million insured loss due to property damage caused by heavy rains in Nebraska,” the company said.

The company’s Plant Nutrients Group, which includes fertilizer production, posted a $3.9 million loss versus a profit of $1.1 million a year earlier largely due to cold and wet weather hitting demand.

“Farmers may not have time or the inclination use as much fertiliser as anticipated in the face of low grain prices,” executives at the company said on a conference call on Tuesday.

In terms of the company’s ethanol business, it posted a $2.6 million profit compared with $3.1 million a year earlier, despite what the company said was a “weak margin environment” as the US suffered from an oversupply of corn that is being funnelled into ethanol production.

The company added that it had already hedged 40% of its Q2 ethanol production at “acceptable margins”.

However, Brian Valentine, the company’s vice president and CFO, told investors that any resolution to a trade deal with China would give a boost to ethanol and exports of DDGS.

“Short-term, we think it could be very positive for ethanol if ethanol is imported alongside DDGs,” he said.

“A trade deal with China would be a shot in the shoulder we’ve all been waiting for, especially ethanol,” he added.

The Andersons closed its purchase of the Lansing Trade Group earlier this year, buying out the 67.5% share of the company it did not previously own from Macquarie Bank and Chinese meat processing company New Hope.

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