This is an article from Business Line ePaper appeared on 22nd January, 2014
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NO LONGER UNCLE SAM'S GRAIN MARKET
Recent views of analysts that world grain prices are bearish simply because they are declining in USA’s Chicago Board of Trade (CBOT), may not be entirely true. Price action in Black sea region has been totally opposite to what transpired in future exchanges. USA’s leadership in agro trade is gradually tripping and pricing of other origins is asserting internationally. Some of the facts reported below descript diminishing role of USA in world’s grain trade.
USA’s share in world wheat trade has declined to 20% from 30-35% in 1990-2008. Recently, Black Sea nations of Russia, Ukraine, and Kazakhstan are the largest single block of wheat exporters of about 35 million tons (mts) while USA’s share is around 28-30 mts in world’s total volume of 140mts.
Egypt, the world’s largest wheat buyer (10-12 mts per annum) is heavily dependent upon Black Sea Wheat( BSW) and so are other nations in Africa and Mid-east. Far- East is supplied by Australian wheat. Since 2011, Indian wheat export of about 5-6 mts is competing with BSW (Black Sea Wheat) and Australia.
US future exchanges-- Chicago Board of Trade (CBOT) and Kansas Board of Trade (KBOT) are no longer “reliable” platforms of price discovery. High speculative interest of hedge funds in future trades distorts evaluations. Even the price trends (bullish or bearish) indicated by these exchanges are disregarded by other origins. During last quarter of 2013, values of US’s Hard Red Winter (HRW-12% protein) wheat which is comparable to Indian wheat and tracked by KBOT have plummeted by $45/mt ($290 fob) , while Black Sea quotes climbed up by $45/mt from $250 to $295.
From India’s export perspective, Black Sea values are more relevant than what is happening in US or its future exchanges. Moreover Indian fob export price has to be compared with the landed cost (CIF) of the nearest origin—that is Black Sea or Australia—to assess the premium or discounts it is fetching from the buyers.
USA is world largest producer of the corn of about 350 mts. USA had about 60% share in world coarse grains in 2000-08 but now down to 40%. This year exports have declined by 26% to 40 mts from high of 54 mts in 2010-11. Recently China “rejected” about 600000 metric tons of US corn on GMO related aberrations though China requires about 5 mts maize this year. USA or its sellers cannot muster courage to drag China to international arbitration or WTO for destabilizing the market for the fear of blocking future business. Embarrassed USA has stomached the Chinese blow in silence, because Red Dragon imports 65 mts of Soy bean, mostly from US. Discarded corn cargos are finally offloaded in Japan, South Korea, Indonesia and elsewhere at a discount. Perhaps to firm up CBOT prices, USDA unsuccessfully fiddled with the corn yield on lower side in its monthly report of 10th January 2014.
Corn exports from the trio-- Argentina, Brazil and Ukraine-- of 20mts each (total 60 mts) keep dampener in US prices due to lower fob values. Thus it is this trio that determines world’s maize prices rather than CBOT. Irony is that the Uncle Sam has supported higher GMO corn productions in these South American countries from where they are facing fumes of competition. Blockage of logistical arteries, road/rail/ports, in Brazil/Argentina are however negative for their trade. Indian corn export is also calibrated basis quotes from this trio and not USA.
USA was never a front runner in rice trade, while India is. Surprisingly, USA and Pakistan are on the same footing for rice production and exports. Each (US and Pakistan) produces about 6-7 mts of rice, and export about 3-3.5 mts. This is in contrast to the India’s export of 10-11 million (25% of world trade) and about 7-8 mts each by Thailand and Vietnam. Global rice trade is forecast to reach 40 mts for the first time from about 38 mts because of additional demand of China to be serviced mainly by Vietnam.
Three demand vectors derive Indian supremacy in rice trade—the populist but unfriendly Thai trading policies, demand pull of Basmati rice from Iran, and switching of Sub-Saharan consumers traditional foods (e.g., cassava and millet) to rice, which is viewed as a “fast” food because of its shorter preparation time. The expansion in African price-sensitive markets has been supplied largely by India and Vietnam.
Rice trade is linked to processing of paddy, packaging, blending rather than bulk shipments. It is more labour intensive. Participation of USA in the rice trade in a big way is difficult.
Lower world markets of wheat and corn are not a good news for Indian exports, which range about 6 mts and 4 mts annually. However in Basmati rice exports –which are growing –is highly value added item. Non-Basmati rice export will depend upon Thailand’s ability to sustain its financial and economic mismanagement. USA price profile is thus marginal so far India’s overseas trade is concerned.