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AUGUST 14, 2014 | WWW.PRODUCER.COM | THE WESTERN PRODUCER
MARKETS
CHINESE CORN | DROUGHT IMPLICATIONS
BLACK SEA | GRAIN SALES
Drought may see China use corn stockpile Little effect on markets | The drought area is significant but the country has massive reserves BY SEAN PRATT SASKATOON NEWSROOM
A severe drought in some of China’s key corn producing states will likely have no impact on markets, says an analyst. Chinese newspapers are reporting that the worst drought in decades is hitting 12 provinces. It is centred around Henan and Hebei in the North China Plain. Bloomberg news service reported last week that Shanghai JC Intelligence Co. forecast the drought would cause China’s corn crop to slip to 200 million tonnes from 203 million tonnes last year. It would be the first time since 2009 that China would not post an annual increase in corn production. Fred Gale, senior economist with the U.S. Department of Agriculture’s Economic Research Service, said the drought area is a significant corn growing region. About half of the drought stricken area is in Henan, which is the fifth largest corn producing province, accounting for about nine percent of the country’s annual production. Summer precipitation in that province has been the lowest since 1951. But Gale hasn’t paid too much attention to the drought. “It doesn’t seem to be a catastrophic event that would really have a negative effect on markets,” he said. Chinese newspapers are reporting the drought is affecting between 2.5 and 10 million acres of land. That is a drop in the bucket for a country with about 310 million acres of cropland. The second reason he isn’t overly concerned is that China has massive reserves of high-priced corn that the government is having trouble selling. A drought might help reduce stockpiles. China’s policy of buying corn from its growers at inflated prices has
A girl collects water from a puddle at a dried-up reservoir as her father stands beside her in China’s Henan province July 30. Lingering droughts in most parts of China have affected millions of acres of agricultural crops. | REUTERS PHOTO resulted in huge stockpiles of the crop. That has reduced the need for imports, which has market repercussions around the world. Two million tonnes of corn that China imported in 2011 has recently been sold through government auctions, said Gale. That provides some indication of how much corn is on hand and why
China is less than enthused to be importing more of the product. China has essentially banned corn imports by rejecting shipments containing Syngenta’s MIR 162, a genetically modified variety that has been awaiting approval from Chinese regulators for more than four years. Some people in the trade think the government’s reluctance to approve
the trait is actually a non-tariff trade barrier for a country that is already overstocked in corn. Traders were getting around the ban on MIR 162 by importing dried distillers grain, but the government has also put restrictions in it, demanding certification that DDG imports do not contain the MIR 162 GM strain.
IMPORT BANS | REMEMBERING 1980
There are dangers in using food as a weapon MARKET WATCH
D’ARCE McMILLAN
R
ussia is retaliating against economic sanctions levied on it for stirring up trouble in Ukraine by banning food imports from Canada, the United States, European Union, Australia and other countries. For older farmers the situation might bring back memories of 1980 when the administration of American president Jimmy Carter embargoed grain sales to Russia as punishment for its invasion of Afghanistan. The event made the cover of Time
magazine with the headline Grain As a Weapon — Who Wins, Who Loses. The embargo covered grain exports in excess of eight million tonnes guaranteed under the terms of a 1975 bilateral agreement. The embargo lasted only until April 1981 when the new president Ronald Reagan dismantled it. The idea was that as Russia had become increasingly reliant on grain imports in the 1970s and because the U.S. was the largest supplier, an embargo would shake the Kremlin as food shortages raised the ire of the Russian people. But it didn’t work because other grain exporters, including Canada, did not follow Washington’s lead. The Russians continued their occupation of Afghanistan. Indeed they did not leave until 1989. The Cold War between the U.S. and Russia escalated under Reagan. The Russians diversified their list of grain suppliers and never again
allowed the U.S. to provide more than half their import needs. It can be argued the 1980 embargo hurt U.S. wheat farmers more than it hurt Russians. The first half of the 1980s was a period of huge Russian wheat imports, exceeding 20 million tonnes a year in three years 1981-82 to 1983-84 and topping out at 28.7 million in 1984-85. But the U.S. wasn’t able to capture much of the market. Canada did very well from the embargo. In 1980-81 Canadian wheat exports to Russia doubled from the year before to 4.4 million tonnes and in the follow years sold even more, becoming Russia’s top supplier. Canadian wheat sales to Russia peaked at 7.6 million tonnes in 1984-85. The tables are reversed this time. Whereas Washington’s plan failed in 1980 because there were many sellers, Vladimir Putin hopes his plan will succeed because there are
lots of sellers. Brazil is already Russia’s top source for pork and it can likely supply more. The fruits and vegetables it got from the EU can be replaced with product from Asia. For now, Putin remains popular, thanks to his control of the media and the Kremlin’s propaganda message that Russia is fighting fascists in Ukraine. But the new imports will likely come at a higher cost, a price Russians can ill afford as their economy struggles against the West’s economic sanctions as well as long-term problems with low productivity, corruption and mismanagement. Time will tell if this exercise of using food as a weapon will backfire, hurting Russia more than it helps.
Follow D’Arce McMillan on Twitter @darcemcmillan.
Black Sea grain exports well positioned MOSCOW, Russia (Reuters) — Russia and Ukraine, both major Black Sea grain exporters, are poised for strong sales campaigns despite political crisis and economic sanctions with their near record harvests. Western countries have imposed sanctions on Russian banks and several companies, limiting their access to medium and long-term financing over Moscow’s support of rebels in Ukraine and the annexation of the Crimean peninsula. However, they have left short-term finance, crucial for Russian trade, unaffected so far, which together with the coming financial help for Ukraine will allow the near-record harvests in both countries to dominate their markets. “Russia will most likely remain a successful grain exporter this year as sanctions did not impact short-term credit,” a Kiev-based trader with a large Western firm said. He also expects Ukrainian wheat exports to remain high. While Russian grain remains unaffected, sanctions have already limited access to Western money for Russia’s biggest oil producer Rosneft, which accounts for 40 percent of Russian oil production. They have also put oil traders on guard. Food and grain supplies to other countries are worth $16 billion, accounting for three percent of Russia’s 2013 $526 billion exports, compared with 70 percent brought in by oil and gas exports. Grain exports alone were worth $4.8 billion in 2013, according to the country’s statistics service Rosstat. Despite these modest foreign currency earnings, any sanctions on Russia’s grain trade would probably lead to a rise in global wheat prices, currently near a four-year low. Russia shocked grain markets with a one-year export ban in 2010 when drought ravaged that year’s harvest. The move proved the catalyst for a surge in grain prices and political instability in the heavily importdependent Middle East and North Africa region. The risk of further sanctions ahead will support demand for Russian wheat early in the 2014-15 marketing year, which started on July 1. “The threat of sanctions will only make exporters more eager to make quick sales early in the season as the crop arrives,” a German trader said. However, the risk to exports was played down by traders based in Russia and Ukraine. “Exports from Ukraine and Russia ... will continue despite all sanctions and political aspects because for many consumers, price of grain and not politics, is important,” said Mykola Vernytsky, head of Ukraine’s ProAgro consultancy. “Any real problems for exports would be in one case — only if fighting (reaches) the ports,” he added. Russian crop analyst SovEcon says it is a quality harvest. “Russia is having a fantastic crop and that’s where all the protein is — there’s plenty 12.5 percent protein milling wheat in Russia so the only demand that’s going to go to the EU is the zero bug damage market where they can’t buy Russian,” a European trader said.