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Doud projects high commodity prices through harvest 2022

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China will keep driving commodity prices with its ongoing strong demand for protein and feed to feed its animals.

In the last nine months, the United States has set a record for all-time U.S. agricultural exports to China. Gregg Doud, former U.S. agricultural trade negotiator, doesn’t know if China will reach its promised level of $40 billion for the year, but he thinks there’s a legitimate chance it could come really close. This also could bring continued strength to U.S. commodity prices with China’s continued appetite of U.S. ag goods.

While speaking at the American Feed Industry Association’s Purchasing & Ingredient Suppliers Conference in Orlando, Fla., Doud shares China’s ag imports are enormous at roughly $150 billion per year from all over the world. “The fact we can do $40 billion is not a pipe dream at all,” say Doud, who now serves as the chief economist at Aimpoint Research.

The two-year deal negotiated under the Trump administration with China expires at the end of this year. “We have to be mindful on Jan. 1 of next year, the U.S. will still have $360 billion worth of tariffs on imports from China,” Doud says. He notes all of the structural changes negotiated in the Phase One agreement will stand, however, another conversation will likely be coming.

Once the deal is done, China likely will stir up situations to create leverage to do something about eliminating those $360 billion in tariffs. “Things are good now, and they can continue to be good, but there will be uncertainty I promise you and friction with all of this,” Doud says.

Feed demand

As China continues to recover from African Swine Fever, it has banned the feeding of swill – or food waste – to its herd. This has boosted demand for feed grains, including soybeans for crushing and corn. Doud says they don’t want to import meat, but rather want to import the feed.

He’s unsure on Chinese corn demand, which could range from 5 mmt to 40 mmt, because its hog herd continues to fluctuate, and transparency has dropped considerably in recent months with reports that African Swine Fever is still rampant across China’s hog herd. Doud says the lack of transparency is because “they don’t want to be in a situation where they feel trapped in the marketplace.”

He says soybean demand continues to be impacted by the price of hogs. When the hog price is as low as it is because of mass liquidation and product coming on the market, the demand for feed goes down and also sends soybean meal demand lower.

China knows for corn from now until March, the United States remains China’s only likely supplier. Seasonally, imports of soybeans tilt to the United States’ favor from September until February. Doud says last year during that timeframe shipments were maxed out, and that was with a 500-million-bushel soybean carryout that isn’t there this year.

Ocean freight is also double what it was a year ago, Doud adds. The soybean crushing margin in China is negative. He says ocean-going boat freight may not expand for two to three years, which poses a real issue on the supply chain going forward. This is in addition to an already dramatic situation on the container availability side of the equation.

The global supply and demand for corn and soybeans remain very tight. With the price of corn in Brazil at over US$8/bu., and China priced at US$10-$11/bu., Doud doesn’t see much downside potential of lower commodity prices in the near term.

“I don’t think there’s potential for commodity prices to come down,” Doud says. “When it comes to the global supply and demand of protein, corn and soybeans, I don’t think there’s anyway to bring prices down until after next year’s U.S. harvest at the earliest.”

U.S. exports remain at record highs, but Doud also says there’s a recognition to limit what goes to China to balance the portfolio to make sure not all the eggs are in one basket. The good news is U.S. ag exports to all other markets in addition to China are strong.

The question going forward is whether at these price points for markets such as the Philippines and Indonesia for meat and feed grains, can these countries keep chugging along at the volumes they are buying today? The tell-tell sign will be whether trade starts to fall off at these higher prices. “If they can afford it, we’re in good shape for a long time,” Doud says.

Protein demand

Doud adds the demand for protein in China is “mind-bending.”

On the pork side, they don’t want to import meat, but they will if they have to as its herd size struggles to reestablish. “The whole notion of China being a constant $2 billion exporter of pork isn’t quite something we should bet the farm on,” Doud says.

There are “enormous opportunities particularly on the beef side of the equation” in meeting China’s protein demand.

As Brazil has slaughtered possibly as high as 50% of its herd, and Argentina even banned beef exports, the demand for beef to China could be important.

 

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