Main opportunities and challenges for 2020 on the grains and oilseeds market

23 January 202011 min reading

Today global trade in grains is part of our food system ensuring to fill the gap between supply and demand. The patterns of global grains and oilseeds trade are constantly evolving, as rising incomes and urbanisation of expanding populations contribute to changing dietary preferences. IGC secretariat bring you a good landscape of what would be the main opportunities and challenges for the year 2020 on the grains and oilseeds market.

Amy Reynolds Alexander Karavaytsev Darren Cooper International Grain Council

WHEAT MARKET: DYNAMIC CONSUMPTION AND NTMs This is the case for wheat-based foods in parts of Asia and Africa, where consumers are shifting away from domestically produced staples such as maize and rice. For instance, Egypt has long been the number one wheat importer in the world, but its position will soon be challenged by Indonesia, a non-wheat producing country whose imports have doubled in the past decade amid growing demand for wheat products. Other fast expanding markets include Bangladesh and a host of countries in sub-Saharan Africa, including Nigeria.

Changing dietary preferences toward foods that are not grown locally, or produced in insufficient volumes, increase the reliance on imports from major growers. These shifting trade flows could, in the future, be exacerbated by climate change if adverse weather impacts local harvests. Trade itself is vulnerable to extreme climatic events, as well as to geo-political developments, potentially contributing to disruptions or bottlenecks for the movement of commodities, both to established and developing markets.

Beyond the fundamentals of supply and demand, one of the key challenges for global grains trade in recent years has been increased tensions between major market players. However, impediments to trade take many forms and non-tariff measures (NTMs) have increased in number and complexity over many years, and today represent one of the key challenges to the free flow of global trade.

The impact on wheat trade of NTMs is particularly significant, accounting for as much as one-third of all such grain-related measures according to some estimates. NTMs are often used as a means of protecting against risks to human, animal or plant health, but there are dangers that such measures can be become a more general policy tool to regulate imports.

Legitimate or otherwise, NTMs can increase the commercial risks to traders, as well as inflate costs related to compliance and administration. Maximum Residue Limits (MRLs) are often cited as one of the major challenges, with traders facing tightening and often diverging standards in different countries. Food safety-related measures are sometimes criticised for being based on societal expectations, rather than science, including in relation to genetically modified organisms, as well as environmental and sustainability requirements. At the very least, NTMs can add cost and complexity to day-to-day business.

One of the Council’s overriding aims moving forward will be to continue to promote the expansion of international trade, and to secure the freest possible flow of this trade, including the elimination of trade barriers and unfair and discriminatory practices.

MAIZE MARKET: SOUTH AMERICA AS NEW DRIVING POWER! With about one-tenth of world production exported annually, maize is considered to be less exposed to trade issues compared to soyabeans and wheat, where nearly one-half and one-quarter of outturns are shipped abroad, respectively. Nonetheless, trade is an increasingly important component of the global maize supply and demand balance sheet, with flows doubling over the past decade, driven by growing feed use in parts of Europe and Asia.

Owing to larger deliveries to most regions, global trade in maize in the twelve months to June 2020 is predicted to expand for an eleventh consecutive season, to 168m t, up by 2% y/y. While the IGC projection was boosted recently, in part because of brisker than anticipated purchases by South America and Pacific Asia, the figure for annual growth is well below average gains of 10% for the prior two seasons. One should also be mindful of the outlook’s downside potential.

Aside from the broader challenges facing global trade, encompassing softening economic momentum, trade tensions, heightened geopolitical risks and rising protectionist sentiments, more market-specific factors are seen capping gains in maize consumption, most notably the outbreaks of African swine fever in Asia. Since the first case was reported in China in August 2018, the highly contagious disease has spread across Pacific Asia to other major livestock producers including South Korea and Vietnam. Although regional demand for maize has been relatively resilient in the face of the epidemic, due in part to the shift to alternatives to pork, imports by China and Vietnam are forecast to dip for the first time in several years, while a threat of fresh outbreaks persists. Still, China’s 2019/20 imports could yet surpass expectations while the country’s annual purchases are limited by a 7.2m t tariff rate quota (TRQ).

Stiffer competition from alternatives is also seen limiting maize feeding and imports in some regions, including in the EU and Canada. Arrivals to the former could retreat by one-fifth y/y in 2019/20, to around 20m t, amid more comfortable supplies of feed grain and fodder. Nevertheless, the volume will still be the second highest ever, while the bloc will remain the top importer for a third successive year. Deliveries to the EU, typically mostly from Brazil and Ukraine, saw a very strong start to the July/June season thanks to attractive international prices and local harvest delays, but the pace has been slowing – cumulative purchases as at mid-December were down slightly y/y.

On the export side, the major suppliers have enjoyed mixed fortunes over the past few months, but with prices now beginning to converge. Helped by huge surpluses and depreciating local currencies against the US dollar, export prices in Argentina and Brazil have been highly competitive, persistently undercutting offers from the US. As a result, dispatches by the South American suppliers have progressed at a record pace, while US sales have consistently lagged well behind the previous year. However, the latter’s export position has strengthened somewhat lately as weakness in Gulf quotations contrasted with supply-related price gains in Argentina and Brazil. Availabilities in the latter appear to be particularly tight, with local marketing year ending stocks forecast at their lowest in 13 seasons due to surging domestic and overseas demand, while the country’s export pipeline will not be replenished until next July’s main (safrinha) harvest. Besides, the new Argentine government’s export policy changes and worrisome crop weather have added to uncertainty about maize production and trade prospects in that country. Against this backdrop, US sales have picked up, as evidenced by improving export commitments data, but competition from Ukraine is set to remain stiff amid narrow fob spreads, suggesting that freight costs could be the key decisive factor for some buyers. Although the US is likely to boost its market presence in the months ahead, shipments in the year to June 2020 are projected to be about one-quarter lower y/y, resulting in a 10% contraction in the respective share of world exports, to 26%. This compares to 51% a decade ago.

SOYABEAN MARKET: GLOBAL MARKET VERSUS CAPTIVE MARKET? After reaching a record of 359m t in the prior season, global soyabean production is forecast to contract by 5% y/y in 2019/20 as a plunge in US output – tied to reduced acreage and below-trend yields – is only partly offset by potentially improved harvests elsewhere, particularly in Brazil. Nevertheless, although seeding is either complete or well advanced in the region, cutting is still some time away, with optimal conditions required in the weeks ahead to ensure good crop outcomes. This is especially the case in Argentina owing to dryness in core growing areas.

This season’s reduced global outturn is expected to result in a marked tightening of world stocks, by as much as one-third y/y. This mostly relates to a steep fall in the US where, despite prospects for below-par exports, the smallest harvest in six years could result in a halving of inventories. Furthermore, should positive developments in trading arrangements lead to more regular, sustained demand from China, US stocks could tighten even more than currently predicted.

Largely stemming from expanded use of soyameal in Asia – particularly in the dominant Chinese feed sector – global consumption generally rose solidly over the past decade, averaging 5% per annum. However, the market has been characterised by significant demand-side uncertainty more recently. While world consumption is forecast at a record of 359m t in 2019/20, the rate of expansion would be less than half the recent average and mostly reflects the prolonged negative impact of African swine fever (ASF) on pig inventories and demand for feed ingredients in the world’s most populous nation. Increasing uptake in poultry and aquaculture sectors will likely prove only partly compensatory.

Have other markets taken on the engine of consumption growth? While the US, Brazil and Argentina are classified as major exporters, they are also large captive markets, with processed products consumed domestically or exported to an array of destinations. Taken together, total use significantly exceeds uptake in China and, as such, has a sizeable influence on global trends. After rising by 7% in 2018/19, a further modest increase should push up demand to a new high in 2019/20.

In addition to feed sector gains, the government of Brazil is seeking to boost domestic demand through expanded industrial use: after increasing to 11% (B11) in September 2019, the biodiesel blending mandate is scheduled to rise to B12 in early 2020, with further annual increases taking the blend rate to B15 in 2023. Since soyabean oil accounts for close to 80% of overall feedstock utilisation, the policy is aimed at underpinning gains in processing over the medium-term.

Looking ahead, however, a return to trend rates of global growth is by no means certain. This ultimately hinges on a recovery of soyameal demand in China, largely through the rebuilding of hog inventories which have been significantly dented over the past year due to ASF.

For more than a decade, China has been central in shaping global soyabean import demand as world trade rose near-uninterruptedly over a lengthy period, reaching a record of 153m t in 2017/18. In the period since, however, prospects for growth have been greatly compressed by a reduction in China’s requirements as policy and demand uncertainties took hold. The onset of the US-China trade dispute during 2018 saw a heavy shake-up of traditional trade flows, with China securing much larger amounts from Brazil at the expense of US exporters. All of this occurred at a time of upheaval in China’s vast feed sector as ASF led to a collapse in the national pig herd and, with it, a drop in demand for feed ingredients, particularly soyameal. While other, relatively smaller importers – including in the EU, Near East Asia, the Americas and North Africa – have partly compensated, global trade still edged lower in 2018/19. Based on IGC’s most recent forecasts, traded volumes were expected to show little y/y change in 2019/20 as a modest recovery in China’s imports was likely countered by reductions elsewhere.

However, at the time of writing, news emerged of an initial agreement between the US and China, which could culminate in a pick-up in China’s purchases of soyabeans. Should this ultimately lead to a normalisation of trade flows between both nations, it may have potentially significant ramifications for the world market in 2019/20 and beyond. Not only for other exporters, such as Brazil, but for a range of other relatively smaller buyers, which sourced sizeable volumes from the US over the past two years. Furthermore, with new crop supplies scheduled to come on stream during the first half of 2020, recently announced policy changes in Argentina, notably an increase in the effective rate of tax applied to exports of soybeans and products, could also be a key influence in the global market in the year ahead.

TOWARD THE IGC CONFERENCE 2020 The grains and oilseeds global market are at the proof of the globalization. Beyond trade disputes, the economic uncertainty on the 2020 world economy and the lack of policy initiative to overcome the non-tariff measures may hamper these dynamic markets. The next IGC Conference, which will be held on the 9th and 10th June 2020 at London will represent a unique opportunity to address the need for the grains and oilseed sectors to enhance the globalisation, to discuss the policy initiatives needed. The speakers will also demonstrate the proactivity of the Grain value chain when taking actions on reduction of carbon emission.

All the IGC’s team is working hardly to welcome you in the best conditions and provide you the most attractive program.

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