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Keep calm and sell to China

17 February 20206 min reading

"Ongoing concerns about the growing amount of deaths and new cases related to the coronavirus are having an impact on agriculture and commerce. We will see that main two issues that really affected markets about coronavirus wave: 1) less oil consumption (some sources said 25% less) which decrease prices and take effect on vegoils market; and 2) shares fallings due to production restrictions. Moreover, even some Russian analysts trying to explain slow Russian wheat exports using virus affect. But maybe the virus has a bigger effect in our minds than in trade?"

Elena Faige Neroba Business Development Manager, Maxigrain

Official statistics from China on new confirmed and suspected cases of coronavirus infection suggest that the peak of the epidemic is likely to be left behind. The decline in industrial production in China will affect other Asian countries this month, but most factories and plants in the Middle Kingdom will resume work until early March. The Bank of China is likely to expand incentives, and global central banks will continue to cut rates. JPMorgan plans to include Chinese bonds in its benchmark indices, and on the eve of this event, Beijing is likely to do everything possible to maintain the high liquidity of its financial system.

The stability of economic growth and fiscal stimulus in developing countries remains in question, so the market may begin to lay in prices a further reduction in rates by relevant central banks. Low inflation will also contribute to this. Asian developing markets are likely to recover soon after the collapse, but US assets are likely to look more attractive.

Ongoing concerns about the growing amount of deaths and new cases related to the coronavirus are having an impact on agriculture and commerce. As China shuts down the mobility of 60 million citizens, closes businesses and production, and blocks transportation within mainland China in an effort to stop the spread of the deadly virus, imported products are getting backed up at the country’s ports. Some cities are still closed, even DHL can’t deliver documents in banks. Even if you get a shipment to the mainland Chinese ports, there will have to be sufficient truck capacity (for front haul and backhaul) hauling to and from the ports to regional distribution points.

Talking about grains we bear in mind that global prices often depend on US-China tension. If you think that the 15th of January – phase 1 signing day – means something – you are wrong. Under the new U.S.-China trade deal, the Asian country is expected to purchase $200 billion in U.S. products over each of the next two years. That total includes an increase of between $40 billion and $50 billion in ag products in each of the next two years. The U.S. ag industry has been eyeing the February 15 trade deadline for a while. However, what nobody could have seen coming was a worldwide killing virus. China still doesn’t need the US and virus it’s the best way to explain why do they avoid purchases. Kudlow said he didn't "wish China any ill whatsoever," but said the coronavirus could spur business investment in the U.S. The White House adviser said there could be a decrease in exports and production in China, particularly in the pharmaceutical sector, and "some things kind of in the middle when you get to automobiles and auto parts, but there is a lot we don't know." While China’s president has assured U.S. President Trump that trade agreement targets will be met despite the coronavirus, uncertainty prevails in the U.S. ag industry. In 2019, China purchased $16.3 billion of U.S. agricultural products, up from $13.2 billion in 2018, which was an 11-year low. Last year, soybeans made up nearly half of all Chinese purchases, but it’s not those numbers that could satisfy the U.S. China bought protein in LatAm, where local currencies fall and made prices more attractive. “Unless the Chinese government is going to intervene and compel purchases of U.S. soybeans, we shouldn’t expect a lot of exports of soybeans for the foreseeable future. Plus, seasonally, this is the time of the year when the U.S. soybean spigot gets turned off and the South American spigot gets turned on,” he says. Even if China half some tariffs, it doesn’t mean that they will buy. For now, they need only meat. In the end of 2019, China bought almost 1MMT wheat from Australia, Canada and France, and in January near 0,8MMT beans from Brazil. U.S. purchases near 0. U.S. Agriculture Secretary Sonny Perdue said to Reuters that the United States would have to be tolerant if the fast-spreading coronavirus impaired China’s ability to increase purchases of American farm products under the countries’ recently signed trade deal.

In addition, Brazil has a large crop to sell and it is seeing a continued strengthening of the U.S. dollar vs. the real. The latest numbers show us 125MMT production in Brazil. More than expected, this volume pushing prices down. ARC Mercosul estimated the 2019/20 Brazilian soybean harvest last Friday at 15.7% compared to 27.3% last year and 16.2% average. The most advanced harvest is in Mato Grosso where 44.5% of the soybeans have been harvested.

The weather in Brazil continues to be generally favorable for the soybean crop with the one exception of far southern Brazil where dry weather continues to be a concern especially in Rio Grande do Sul, but localized rains in the state over the past month have helped the soybean development according to Emater, which is the state's extension service. There have been some concerns that the wet weather in central Brazil might start to jeopardize soybean yields and quality, but I don't see that as a major issue at present. In fact, the soybean harvest in Mato Grosso increased 17.8% last week to 44.5% compared to the average of 31.7%.

The U.S. trade delegation has conceded that the Chinese purchase agreement has a qualifier that it buys U.S. products only if market conditions are compatible. So, if Brazilian soybeans are significantly cheaper than U.S. soybeans, we can’t compel the Chinese to make those purchases. It’s worth noting that it takes 30 days for a vessel of U.S. soybeans to reach Asia. The good news is that the coronavirus issue could be under control before a load of U.S. soybeans, purchased this week, even reaches a Chinese port. Still, it’s at the Chinese ports where the shipping issues get complicated.

So, if we try to summarize, we will see that main two issues that really affected markets about coronavirus wave: 1) less oil consumption (some sources said 25% less) which decrease prices and take effect on vegoils market; and 2) shares fallings due to production restrictions. Moreover, even some Russian analysts trying to explain slow Russian wheat exports using virus affect. But maybe the virus has a bigger effect in our minds than in trade? More panic we have, more time China gets to take a breath.
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