O’Brien, Allen discuss international grain market trends and impact of geopolitical conflict

Dan O’Brien, Kansas State University agricultural economist, and Guy Allen, senior agricultural economist and grain marketing and risk management curriculum manager at K-State’s IGP Institute, both commented on trends in the international grain market and discussed what impacts geopolitical conflicts have on them during a recent webinar.

Allen believes it could be a critical time going into the summer depending on how the Russia-Ukraine conflict could potentially resolve itself in one way or another.

“The market—I think it’s increasingly paying closer attention to that,” he said. “Thus far having that grain corridor open has gone a significant ways to supply a significant volume of grain in a critical demand area of the world, in an environment where we have very tight global stocks and both wheat, corn and oilseeds as well.”

Resolving the conflict in Russia and Ukraine could come in the next few months, but Allen believes it will take much longer—10 or 15 years—to rebuild the grain capacity and bring it back to any sense of normalcy.

When it comes to China and Taiwan, Allen has greater concern for this area, but in significantly different ways than the Russia-Ukraine situation.

“Basically, because China is a significant buyer of global commodities across the board from wheat, coarse grains and oilseeds,” he said. “Now they continue to rattle their sabers on the Taiwan situation and make it a political issue. That said, we continue to see China be a growing buyer of agricultural commodities in the grains and oilseeds, in the meat products and then fiber there as well.”

Allen thinks that trade relationship and demand for food and fiber is going to make the Taiwan situation take a significant backseat.

“Also, China’s increasingly seen some domestic economic turmoil driven by one the property bubble situation there as property market and property investments have collapsed in recent months,” he said. “That’s making state owned banks holding debt pretty, pretty worthless as that has dropped out.”

A lot of those situations have been put back to the provincial governments to manage, particularly post pandemic. Moving forward, Allen said China has effectively lifted all those bans and restrictions in relation to COVID.

“And that’s going to have significant impact on the economy, as we see that start to recover,” Allen said. “And this is in the wake of what I would suggest we’ve seen significant exit of supply chains out of China into other areas. So we’ll watch that pretty closely and its impact on monetary demand.”

O’Brien said he’s unsure of the economic confidence around the globe that would come from this.

China is still the largest percentage buyer for grain sorghum and is involved with wheat and corn markets indirectly, so it’s troublesome for O’Brien.

Moving on to the Illinois River barge trade, Allen said the high barge rates last fall during the peak harvest season are still fresh on people’s minds. The low water levels in the Mississippi River were the result of dry weather in the western Plains and water flows coming from the Missouri and other western rivers. Since then, levels have started to recover and are reaching more navigable levels.

This is helping the U.S. to be competitive in world markets, particularly in comparison to grain coming out of the Black Sea region and wheat coming out of Australia where the advantage is in transportation to those high dollar value markets of China, southeast Asia and Japan.

“We still are at historically tight levels for global corn, wheat and oilseed stocks following, again, three years of disruptive La Nina weather patterns, affecting some major crop production areas,” O’Brien said. The expected emergence of an El Nino weather pattern is leaning more favor towards crops in North America, but O’Brien is seeing some narratives that the attitude of the markets might recognize the shift too.

Allen reminded those in attendance, that not only is it dry in the U.S., but it’s also dry in Argentina. Regions like Australia and southeast Asia are wet.

“And as a result of that we’ve seen Australia with three years of La Nina have three years of record wheat production down there,” he said. “Those exports are what we’re competing with both in wheat, as well as grain sorghum, into those southeast Asia markets.”

It’s going to take time to transition from La Nina to El Nino and Allen expects other parts of the world to see drought conditions.

Crop market prospects

O’Brien said looking at the 2023 crop markets, U.S. crop prices were generally supported at moderate to high levels.

“Part of our expectation is what we see coming out of Brazil. They’ve had a large soybean crop,” he said. “No fears yet of problems with their second corn crop.

So when will crop market watchers or farmers start to worry about the risk? Most of the time it’s when there’s a possibility of a short crop.

“Actually, in the last several years, some of our lowest prices have come in early September, where we’ve kind of bottomed out and transitioned apparently from a focus on production to focus on use,” O’Brien said. Since many are so data driven, the WASDE reports that come out will be important in 2023, especially the May report since it will have the World Ag Outlook numbers and the 2023-24 marketing year numbers in the WASDE.

O’Brien believes the market is assuming this is a non-issue, but it’s something that could come into play during the next 30- to 60-plus days or even beyond. The market anticipates a normal U.S. crop in 2023, especially if there’s moisture from the emerging El Nino weather pattern.

Wheat markets

There’s historically been tight world ending stocks for wheat, and the tightest of the commodities when looking at stocks to use for 2022-23. O’Brien said wheat market traders’ sentiments go higher or lower based on whether or not a Ukraine trade arrangement is functional or not. Plus, the role the weather plays in the situation.

“When I look at this world wheat situation, we’ve seen record production again this year,” Allen said. “But we’re still seeing demand outstrip production, and we’re going to see if ending stocks can continue to draw upon that.”

For some time, wheat has been priced out of the feed grain ration and there has been record high corn-wheat spread. During late April, Chicago markets were clearly signaling wheat can’t be a feed grain.

“It’ll be interesting to see how much or how little of that moves that direction this year, particularly in the wake of smaller production,” Allen said.

Wheat numbers have been at an 8-year low in terms of percent stocks to use on the world side, according to O’Brien. Production is keeping up, if not higher in the world less China, with 15-year lows for stocks to use in his current marketing year versus the last market year.

China is now the world’s biggest wheat importer, but it’s also the biggest question mark hanging over the market.

He expects there is a level China is going to keep the inventory—most likely one year of usage or demand domestically.

Wheat quality might also play into domestic use in China, as the numbers are pointing lower, with production trending slightly higher than stocks.

Allen believes the Chinese must strategically make the decision where they’re going to get their animal protein from and suggests their preference is to produce the animals and not import them.

There are a few other countries at risk, and Allen already discussed Ukraine, but he also believes the whole “European situation” needs to be kept into context.

“Germany’s facing some significant economic strain in their manufacturing and particularly coming from the energy sector. Just need to keep an eye on that how they’re going to react,” he said. “The (United Kingdom)—they’re still out there, post Brexit trying to figure out where they’re at. They need to establish some trade relationships and they failed to do that.”

Allen thought they would have secured something with the U.S., but he thinks maybe the current administration isn’t quite as keen to lock in on these trade agreements as previous administrations.

“Just keep an eye on the Middle East situation. These countries sort of worried me the most from a commodity perspective,” he said. “Turkey is a significant importer of wheat, particularly from the Ukraine and Russia.” Sudan, South Africa, Zimbabwe and Pakistan are also on Allen’s short list to watch.

“Pakistan is usually a major importer of ag commodities, and their currency sort of collapsed here recently, similar to what happened in Sri Lanka,” he said. “And that is a concern. Hopefully, they’ll work through that and put themselves back on a stronger footing, but that disruption in Pakistan is a concern.”

Kylene Scott can be reached at 620-227-1804 or [email protected].