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Sailing in the storm

22 January 20208 min reading

"The start of the year wasn’t easy for sure. A lot of dramatic passage happened, both natural disasters and the Middle East operational load electrified the spectators. Firstly, the main acts of nature came fatal down. Losses of crops, fodder, as well as compound feed, are expected across the country, with damage still early to be estimated. Secondly, Middle East geopolitical issues supported the oil market. Warnings about military flare-up around Iran shacked price curve. Thirdly, the Trade War and 15 of January “Phase 1 Signing” between the USA and China highly support markets before the last moment."

Elena Faige Neroba Business Development Manager, Maxigrain

Did you have a hunch about a thunderstorm? Well, you know, when you can’t sleep and you all wait, wait and wait for something, but it does not come? When something inside raises some waves, and they do not allow to fall asleep? This is an experience. Yes, I will disappoint you. This is an experience. You have already managed to analyze the news and know what will follow. This is just an experience. And you drink your morning tea, although you know that the inevitable is near. And then it passes. And life goes on.

The start of the year wasn’t easy for sure. A lot of dramatic passage happened, both natural disasters and the Middle East operational load electrified the spectators. Firstly, the main acts of nature came fatal down. Australian Bank Westpac estimates direct losses from Australian bushfires at $ 3.5 billion. "As of January 10, 10.55 thousand claims were filed with Australian insurance companies with a total insured value of about $ 645.6 million," the statement said. As the bank’s experts indicate in their forecast, uninsured losses requiring state compensation “are about twice the size of the insured.” Thus, taking into account the already allocated $1.4 billion by the authorities, "the total cost of the disaster today is likely to be about $3.54 billion."

According to Westpac experts, the fires affecting some of the most densely populated areas of the continent had a very negative effect on agriculture. Farmers were forced to slaughter thousands of cattle, the destruction of power plants affected dairy production, and a number of vineyards were in the zone of active fires and were destroyed. Australia is the seventh-largest dairy exporter in the world, supplying mainly to Asian markets such as fresh milk, butter, and cheese, as well as milk powder. According to government data, the dairy industry is the fourth largest agricultural industry in the country, with a value of $2.3 billion.

According to the country's chief commodity market forecaster, it was previously expected that milk production in Australia could fall to a 22-year low due to the drought, and this led to the struggles of processors for sufficient supplies to meet demand. "Processors have already anticipated problems as milk production in Australia is declining," said Michael Harvey, a Rabobank dairy market analyst.

Many farmers are now trying to feed their livestock and this can affect both milk production and herd reproduction. Wildfires in Australia have damaged 6 million hectares in Queensland, New South Wales, Victoria, South Australia, Tasmania and Western Australia can have a significant impact on the country's grain and compound feed markets, Rabobank analysts said.

Losses of crops, fodder, as well as compound feed, are expected across the country, with damage still early to be estimated, as Australia is now only mid-summer, and there is no indication that the weather may improve, analysts predict. Among other things, it is forbidden to plant any crops in the areas covered by fires, and therefore this year's crop may be significantly less than in 2019.

The total loss of livestock from Australian wildfires will exceed 100,000 heads, the federal government's agriculture minister said. Tens of thousands of head of cattle and sheep were killed in forest fires, either by fire or by asphyxiation. Many farmers have lost all their crops or herds. The National Farmers Federation (NFF) has called for donations of food, food, water, household goods and monetary donations.

Australian Agriculture Minister Bridget McKenzie has confirmed that army reservists are called to dig mass graves for dead animals “as a matter of priority” to avoid any potential biological hazards. Mackenzie has proposed placing another 100 veterinarians on the ground in states affected by wildfires to help euthanize thousands of injured animals. The federal government has announced the allocation of at least $ 2 billion over two years to restore pastures and help farmers. Australian Prime Minister Scott Morrison has promised to do "everything necessary and more" to rebuild the country.

December crop forecast from ABARES hasn’t include bushfires impact. Winter crop production is forecast to fall by 3% in 2019–20 to 29.4 MMT, which is a downward revision of 13% from the forecast ABARES published in September. Forecast production is around 27% below the 10-year average to 2018–19 and is set to fall for the third consecutive year since record-high production was achieved in 2016–17. Winter crop production in Victoria is expected to account for around 24% of national production, compared to an average of 16% over the 10-years to 2018–19. For the major winter crops, wheat production is forecast to decrease by 8% to around 15.9 MMT, 35% below the 10-year average to 2018–19. Barley production is forecast to increase by 4% to around 8.7 MMT, 3% below the 10-year average to 2018–19. Canola production is forecast to fall by 4% to around 2.1 MMT, 35% below the 10-year average to 2018–19. Amongst other crops, chickpea production is forecast to rise by 2% to 289,000 tones and oats production is forecast to rise by 5% to 935,000 tones. The next report will fettle numbers but anyway, the main negative effect Australian farmers got on the livestock industry.

Secondly, Middle East geopolitical issues supported the oil market. Warnings about military flare-up around Iran shacked price curve. Talking on grains, we should bear in mind that Iran is an important player in the grain market, particularly with regional partners, although it is now at, or near, self-sufficiency in wheat. Iranians are among the biggest consumers of bread in the world and the government manages the supply of wheat to ensure adequate supplies. According to the International Grains Council (IGC), Iran’s total grains production in 2019-20 could come to 19 MMT, +0,5MMT YoY. Of the total, wheat accounts for an unchanged 14.5 MMT. Barley production is forecast at 3.2 MMT in 2019-20, vs 2.8 MMT YoY.

Iran’s total imports of grains in 2019-20 are forecast at 13.3 MMT, up from 12.5 MMT YoY. It’s mostly corn: at 9.8 MMT, and around 5,5MMT of it – Brazilian origin. Barley imports are forecast at 3.2 MMT in 2019-20. Iran is forecast to import 2.2 MMT of soybeans in 2019-20, the same level as in the previous year. The IGC forecast for soymeal imports is also unchanged on the year at 2 MMT.

But after Brazilian President Bolsonaro stood on the US President Donald Trump’s side following a recent killing of an Iranian military leader, Iran has announced it will no longer purchase corn from Brazil. For today just a few countries supplying grains to Iran. For example, Russia from the beginning of current MY sold more than 0,7 MMT of corn, 0,5 MMT of barley and near 100,000 MT of wheat without showing it in official custom statistics. Partly Russia could satisfy Iranian demand but not for all commodities. Will Turkey do it? Another thing interesting to mention is that in a week before conflict escalation, Iran makes a deal with Russia for a few shipments of wheat. Firstly, it was a rumor about 1-3 MMT, but after Russian United Grain Union saw about 130,000 MT before February 2020. How did they know it in advance?

Thirdly, the Trade War and 15 of January “Phase 1 Signing” between the USA and China highly support markets before the last moment. As agreement conditions were unclarified prices increased both futures and cash markets. But after the ceremony, it makes cooler. China agreed to increase purchases of American products and services by at least $200 billion over the next two years. But the main case is small phrase – “on market conditions”. Before the trade war, China bought $130 billion in the USA goods and $56 billion in services. The total number for 2017 was much less than new target. Also, China has committed to $32.9 billion increase in 2020 and a $44.8 billion increase in 2021 in additional manufacturing purchases over two years vs 2017 levels, at least $52.4 billion in additional energy purchases. That’s why China announced a few days before to delay there 10% ethanol blending citing food security concerns?

Additional purchases of the USA agriculture products by $32 billion over two years is the most interesting for us part. But if we try to compare the best trade years numbers, it’s clear to understand that it’s more impossible: corn best years were 2011 - $13,7billion or 2018 – 69,75MMT, soybeans – 2012 - $24.8 billion or 2016 – 57.8MMT, wheat – 2008 - $11.3 billion or 1981 – 43,9MMT, pork – 2014 – $6,65 billion or 2017 – 2,45 MMT. We extremely should bear in mind that none of them were in the same year and max value different from volumes as well. Besides these, even the sum of the best-years just lightly higher target volume, but prices are twice lower than those years.

So, if we feel that something could happen, let’s remember Aristotle Onassis: “We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds”

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