Chinese Commodity Demand Helping Lift Ag Prices

BY JOHN MILLER

As recently as July, farmers here and across the US were anticipating a prolonged period of low commodity prices given the perfect nature of US crops, a generally well-balanced world agricultural supply and demand situation, lingering negative Covid19 effects on the economy, and uncertain trade relations with China. Since that time, we have seen some deterioration in US and world crop conditions.

An expanding drought across the US Western Plains coupled with a very active and sometimes destructive hurricane season (think valley cotton) rapidly reduced national estimates of plenty to one of supplies tight enough to warrant higher prices. In addition, too-dry conditions for a good start to both wheat across Eastern Europe and soybeans across South America only added to the growing sentiment that 2020 global supplies would end up being well below expectations. Evidence was also growing that governments worldwide were starting to relax Covid19 restrictions on travel as both gasoline and ethanol demand began recovering, reaching more than 80 percent of pre-Covid19 levels by summers end.

Using corn futures as our guide, you can see from the chart below that even though these market-friendly stories were developing throughout the summer, prices remained at historically low levels until late September. Part of the reason for the subdued price reaction is that up to this point the marketplace was dealing with a mostly supply-side phenomenon that would take time to fully understand. For example, with the Midwest harvest and South American planting season both months away, weather could turn more favorable. Therefore, speculators were reluctant to lean heavily into ownership. What changed during September that led to the abrupt price increase you see happening across the month of October? This answer relates to a sudden and significant increase in the demand for US commodities by China.

This unexpected demand from a country that we were not sure would try to meet the terms of the most recent US-China trade agreement helped add an important demand side feature to other concerns in the agricultural marketplace. The concerning supply side issues getting reinforced by unexpected demand ultimately grabbed the attention of the speculative community and led to corn prices exceeding $4.00. 26

Let us continue to look at corn to get a sense of where we are versus last year. From the chart titled “Weekly US Corn Export Sales”, you can see from the dark blue line that this past weeks sales of over 100 million bushels far exceeds the 20 million bushels sold this same week last year. Even when you consider that 2019 export sales were very low due to the US-China trade dispute, it is hard not to be impressed when 2020 is compared to the 5-year average range shaded in blue. It is true that some of our traditional customers like Mexico have increased purchases of late, but is has been the 15 million metric tons of unexpected corn purchases from China so far this year that have captured the imagination of speculators. The export numbers are even more dramatic with looking at soybeans.

The “US Soybean Export Sales to China” chart shows that by October 22nd of this year Chinese firms had already purchased upwards of 26 million metric tons of soybeans, far surpassing the entirety of the past two years and almost matching the entirety of 2017. It is likely that by years end, Chinese purchases of US soybeans could set a record and help draw down US excess supply to rationing levels. After suffering from the hog herd reducing affects of the African Swine Fever since 2018, and a fall off of consumer demand due to Covid19, China is working overtime to rebuild their hog herd in anticipation of a post-Covid19 marketplace that is expected to include sharp increases in consumer demand, especially for pork and the soybean oil used for cooking.

In addition to greater US corn and soybean sales, sorghum has also seen a sharp increase in exports to China. From the “US Milo Export Sales Progress” chart, you can see how the weekly sorghum export sales since the beginning of the marketing year in September has far exceeded the 2019 sales pace, and the USDA projected pace for the current year. The cumulative weekly sales of almost

150 million bushels has pushed sorghum prices at major Gulf ports to $11 per hundredweight or more which is a level not seen in several years. As the “Top 10 Marketing Year to Date” chart shows, just over 100 million metric tons, or nearly 75 percent of the total, was purchased by China. This represents an amazing recovery from a year ago and reminds us of the strong Chinese purchase of sorghum from the 2013 to 2015 period. 150 million bushels has pushed sorghum prices at major Gulf ports to $11 per hundredweight or more which is a level not seen in several years. As the “Top 10 Marketing Year to Date” chart shows, just over 100 million metric tons, or nearly 75 percent of the total, was purchased by China. This represents an amazing recovery from a year ago and reminds us of the strong Chinese purchase of sorghum from the 2013 to 2015 period. When the planting of the valley sorghum crop just around the corner in February, one wonders if the Chinese buyers will be as strong of a sorghum buyer again for the 2021 crop. If the Chinese market softens, other users such as Mexico would replace some of that demand. However, experience has shown us that non-china users will not pay a premium for sorghum over the price of corn. The fact that the Chinese government heavily subsidizes their local corn prices coupled with the lack of sorghum suppliers there helps create the opportunity for US sorghum to be utilized at premium prices whether supplying a feeder market, or the Baijiu (distilled liquor) processing market. It has not hurt that China relaxed import tariffs on US commodities under the Phase One agreement and the US Dollar has fallen, making our products more affordable from that standpoint as well. And all indications are that current economic and political conditions between the US and China favor a continuation of the current sorghum trade into next year. This would be great news for valley and US sorghum growers and allow them to have greater planting flexibility headed into the new year. And corn will

still play an important role since Mexico has become an even more important market for valley and US corn. The next market to tackle is cotton. China has rebounded to some extent, having (surprisingly) purchased up to 2 million bales of the current US cotton crop with expectation for more sales given the indicated need for adding better quality to their inventory. The global commodity marketplace seems to be adjusting and further preparing to deal with more equitable trade relationships, and post-Covid19 recovery measures that should help world trade, especially once a Covid19 vaccine is available.

Fortunately, valley farmers are very good at growing crops that are readily used in close-by markets such and Mexico and broader Latin-American, and faraway places such as China. If we are fortunate enough to have favorable weather on our crops next spring and summer, 2021 could provide some of the better overall opportunities seen in some time.

(John Miller is the founder and owner of Southwest Ag Consulting that provides individualized risk management consulting services to farmers and ranchers across the south plains.)

Hidalgo County farmer DIRECTS america’s farmers grow communities donation To BORDERLINE 4-H Club

• The America’s Farmers Grow Communities program, sponsored by Bayer Fund, partners with farmers to provide grants to local non profits to help their communities.

• Through the program, farmers enroll for the chance to direct a $2,500 donation to a local eligible nonprofit organization of their choice.

• The America’s Farmers programs have given more than $57 million to rural America since 2010.

Weslaco, Texas October 7, 2020– Local farmer Mr. & Mrs. Tommy Bradford recently directed a $2,500 America’s Farmers Grow Communities donation, sponsored by Bayer Fund, to Borderline 4-H Club. Borderline 4-H Club will use the funds to support and enhance club membership and provide financial support to member’s various 4-H projects.

Borderline 4-H Club President, Emily Cortez, stated, “Thank you Mr. and Mrs. Bradford, on behalf of Borderline 4-H. This incredibly generous financial donation will further support our members with their various livestock and Ag Ed projects.”

Since 2010, the America’s Farmers programs have awarded more than $57 million to nonprofits, aspiring ag students and public schools across rural America. Farmers know the needs of their communities best, so the America’s Farmers programs rely on them to help identify the most worthy causes.

The Grow Communities program partners with farmers across the country to provide nonprofit organizations with resources to strengthen their local communities. Each August, farmers can enter for the chance to direct a $2,500 Grow Communities donation to a local eligible nonprofit of their choice. Farmers have directed donations to food banks, emergency response organizations, schools, youth agriculture programs and many others that reflect the spirit and support the vibrancy of rural America. “Farmers truly understand the needs of their communities and where the opportunities to strengthen them exist. We partner with them to identify the nonprofit organizations that benefit from Grow Communities donations,” said Al Mitchell, Bayer Fund president. “Each donation shines a light on the organizations that are making a positive difference in rural communities across the country. Bayer Fund is proud to partner with farmers to give back in rural America.”

To learn how you can be an America’s Farmers Grow Communities recipient, visit www.AmericasFarmers.com. The America’s Farmers Grow Communities 2021 program will kick off on August 1, 2020, and farmers will once again have the opportunity to enroll for a chance to direct a donation to a local eligible nonprofit of their choice.

About America’s Farmers

America’s Farmers, sponsored by Bayer Fund, is focused on strengthening rural America through three community outreach programs that partner with farmers to make an impact in communities where farmers live and work. The programs have given more than $57 million to rural America since 2010 and include:

• America’s Farmers Grow Communities supports rural communities by allowing farmers the opportu nity to direct a $2,500 donation to their favorite local nonprofit organization.

• America’s Farmers Grow Rural Education supports rural education by providing $15,000 merit-based grants to enhance STEM education.

• America’s Farmers Grow Ag Leaders supports students pursuing ag-related studies by offering $1,500 scholarships towards higher education.

To learn more, visit America’s Farmers at

www.AmericasFarmers.com.

About Bayer Fund Bayer Fund is a nonprofit organization dedicated to strengthening the communities where Bayer customers and employees live and work by providing funding for food and nutrition, education and community development projects.