Agribulk trades into China and other parts of Asia have grown in volume in recent years.As the continent’s middle class swells and dietary demands evolve, more imports will be
needed in the future, writes Michael King.
The importance of the agribulk trades to the overall health of the dry bulk market often gets underplayed. However, on certain trades they are, particularly for vessels smaller than the iron ore and coal dependent Capesize
segment, absolutely critical, not least because lanes from South America into Asia suck tonne-miles out of the fleet.
Illustrating the point in March was the eloquent Jack Scoville, an analyst with The Price Group. “The beans are leading the charge and there’s more talk that China is interested in getting some summer US shipments,” he said. “The ports in South America look like they’re going to be full right through next month so we might continue to see business come here to the United States and see this price support.”
Strong seasonal grain and soyabean demand has, as Scoville noted, been one of a limited number of positives that vessel operators and owners have been able to cling to as freight rates have been decimated by excess vessel supply over the last 12 months.
As with so many cargoes, China has been the world’s most dynamic importer and market shaper in recent years. China’s importance to the bulk trade was made loud and clear last year when it became the largest buyer of US farm goods with $20 billion in purchases.
High levels of demand for grains continued in the early part of this year as China’s grain imports, both from the US and South America, rose to their highest level in at last seven years. A total of 1.64mt (million tonnes) of cereals and cereal flour were purchased from overseas markets in March, compared with 280,000 tonnes a year earlier. About 70% of the cereal imported by China in March was corn, according to agricultural research company Shanghai JC Intelligence.
The country also saw wheat imports in the first two months of the year increase by more than 200% compared to 2011, while barley imports increased 144%.
Similar growth has been even more apparent in the soyabean sector where China now accounts for more than 50% world trade. China’s imports rose 14% year-on-year in the first quarter when imports reached 12.5mt and analysts expect further increases as the year progresses.
The world’s biggest soyabean importer is forecast to buy some 58mt of the oilseed in the 2011/12 season, up 5.5% from a year earlier and a new record.
The main reason for rising imports of grains and soyabeans to China, and to a less extent South East Asia, is the rapid economic growth enjoyed by Asia over the last two decades. Rising incomes are prompting a major change in food consumption patterns, most notably a shift towards dairy and meat consumption which is spurring both food and livestock feed demand. “In emerging countries, economic growth results in the rise of a new middle class,” said analyst Christophe Pelletier. “A change of diet is the first change that takes place
when the standard of living increases. People switch from staple foods such as rice or wheat to higher quantities of animal protein.”
Different animal productions have different levels of feed efficiency. So, for example, it takes about 1.8kg of feed to produce 1kg of chicken meat, but 3kg of feed to produce 1kg of pig meat. “With a population of 1.5 billion, an increase of meat consumption of 30kg would result in the need to produce 3 times 30 times 1.5 billion,” explained Pelletier. “The need for feed, excluding grass, would be between 100 and 150mt of grains.”
Pelletier points out that the relative consumption of Western countries will shrink dramatically in the years ahead as Asia’s buying power further bulges. In 2000 the USA represented about 5% of the world population and consumed about 25% of the world’s resources. By 2030 those figures will fall to 4% and 4%, with similar declines also expected in the European Union and Japan.
By contrast, India and China will stake ever larger shares of world consumption as their economies thrive, transforming agriculture and shipping markets in the process. “Estimates are that the middle class from China and India combined will represent about 45% of the world middle class by 2030,” said Pelletier. “Market demand and therefore world prices will be dictated by the demand from these two countries and not by Western countries anymore,” (see graph on p17).
Given that China’s farmland has shrunk 8.33 million hectares in the past 12 years and land under cultivation has already fallen almost to the government’s 120 million hectare limit, it is expected that much of this increased demand will have to be imported in the years ahead.
“Grain imports are on a rising trend in China because of limited arable land, water and labour at a time when demand is growing amid increasing incomes and changing diets,” said Li Qiang, managing director and chairman at agricultural research company Shanghai JC Intelligence.
Food 2040, a recent report from the US Grains Council which forecasts demand trends in Asia, agreed that changing diets in China will provide a major boost for grain and feed demand.
“In 2040, the global food and agriculture market will be heavily shaped by Chinese preferences, needs, and
developments,” said the report.“As China develops its food and agriculture system and the supporting infrastructures, and as its growing income boosts food consumption, the country’s influence in global markets will be far-reaching, well beyond the impact of market size alone. It will shape and redefine global agribusiness, biotechnology, food processing, logistics, and trade — increasingly from a position of
strength.” The report argued that growing demand for meat in Asia will continue to fuel demand for bulk grains. It also found that trade growth in future would be dominated by specialized grain products such as identity preserved and nutrient enhanced. “East Asia will eventually develop an advanced intermodal logistics system to monitor and transport the specialty grains needed to satisfy consumers’ demand for specialty and niche food products,” said the report.
The upshot of these trends? Analyst company Intl FCStone, forecasts that by 2015/16 China’s corn imports could soar to 28mt. Meanwhile, the U.S. Department of Agriculture expects China’s soyabean imports to rise to over 80mt by 2020 (see chart on p15). The volumes are not comparable to the growth rates from the coal and iron sectors, but for owners of Handy and Supramax vessels, they will be greatly appreciated.
Good monsoon leads to significant rise in production of foodgrains
Indian authorities have compelling reasons to exercise discretion to a fault when the decision involves allowing exports of foodgrains or a soft commodity like sugar, writes Kunal Bose. This is because the primary responsibility of Indian government is to ensure enough food for a population of 1.2 billion. At the same time, the government must at all times keep enough stocks of foodgrains and sugar in its warehouses from where supplies could be drawn in a bad crop year. Sugar producer Om Prakash Dhanuka says “in a populous country like ours, the government has to be concerned about supply side deficiencies. Thankfully, stung by popular disquiet about unacceptably high inflation in food prices in the past couple of years, supply side problems for the first time are holistically addressed. We have heard promises in two consecutive national budgets of steps being initiated to improve farm productivity, staunching crop losses by creating adequate storage capacity and striking a fine balance between rewarding farmers for their efforts and affordable food prices for consumers.”
The fate of Indian farm production being still largely dependent on the behaviour of monsoon, once in every few years when drought visits the country, supply side derailment is unavoidable. As recently as in 2009/10 crop season (July to June) severe drought in most parts of the country saw foodgrains production slipping 16.3mt (million tonnes) to 218.1mt with disastrous consequences for their prices and exports. One
important lesson learnt from that scary experience is that irrigation coverage for rice, oilseeds and pulses requires very substantial stepping up and that too quickly. Mercifully, well over 90% land under wheat (around 26 million hectares) and sugarcane (close to 5 million hectares) has access to irrigation water. Finance Minister Pranab Mukherjee is aware that he has to find money for a more universal coverage of all food crops under irrigation network along with breakthrough research in agriculture, dissemination of technology and adequate provision of farm inputs for attainment of higher levels of productivity. Dhanuka points out “India will have to do a lot of catching up in most crops to be in approximation with best global parameters.”
Aided by good monsoon, the country’s foodgrains production rose significantly to 244.78mt, including 90.98mt of rice and 86.87mt of wheat in 2010/11. This time it is proving to be even better with rains more evenly spread across most parts of the country and also a long winter to boot. The Economic Survey says, according to the “second advance estimates, production of foodgrains during 2011/12 is estimated at a record 250.42mt.” Foodgrains production spurt is on account of good showing by rice and wheat. While rice production is estimated at 102.75mt, agriculture secretary PK Basu will not rule out the possibility of wheat output climbing to 90mt or more. He says,“It’s still a speculation. But if the current situation continues, maybe we can achieve that. The weather is so good, with no major pest attacks so far.” In any case, wheat already has moved ahead of production target of 84mt for 2011/12. Output of pulses and coarse cereals is, however, likely to fall behind last year’s level on account of less planting.
No wonder in the wake of two consecutive good harvests, the country’s grain stocks on 1 March 2012 was up year on year by 18% to 54.52mt, substantially more than buffer norms, including the extra food security reserve. The government is, therefore, in a position to be liberal in wheat and rice exports while domestically it has to implement the proposed food security law requiring supply of subsidized grains to 75% of rural and 50% of urban households. Dispensation under the law will claim 63mt of grains, that is, 8mt more than under the current regime. This is, however, no deterrent to India being gung ho about exports of both rice and wheat in the current as well as in the next season. A feeling of ‘food security’ led the government to remove the four-year export ban on cheaper varieties of rice in September 2011. India rejoining the rice exporters’ fraternity proved to be of much relief for importing countries like Indonesia and in the Middle East and Africa. Elaborating on the point, Samarendu Mohanty, chief economist with the International Rice Research Institute, says India’s return as rice exporter prevented a spike in world prices of the commodity. “India came as a saviour. The timing was so perfect because Thailand was implementing in the same month its rice mortgage programme when it increased domestic rice price by nearly 50%. It pretty much boiled down to: if Thailand had increased rice prices like that, then global prices would rise accordingly. But that didn’t happen because of India,” says Mohanty. In an identical vein, All India Rice Exporters Association president Vijay Setia says even as costs are up in a regular exporting nation like Thailand, re-emergence of India as a seller in the world market has “helped in stabilizing prices.” Indian rice is also coming cheaper than the one of Vietnamese origin.
World buyers are showing preference for Indian rice which at between $500 and $530 a tonne is selling at a big discount over the Thai grain priced at $600 a tonne. What automatically followed was India marching ahead of Thailand in terms of volume of rice exports. Besides the official scheme to guarantee prices, floods damaging crop robbed Thai rice of some competitive edge in the world market. This is happening in a year when according to the Food and Agriculture Organization, global rice production is up 3% to 480.4mt. Trade officials say, Thai rice exports in the current year could be down by 1mt to 9mt. But what about India? The general consensus here is that the season will see the country exporting at least 6mt, including 3.5mt of normal rice and 2.5mt of long grain aromatic basmati rice, much in demand all over the Middle East. Exports of the latter variety got a boost with the government finally accepting the trade suggestion to lower the minimum export price to $700 a tonne from $900 a tonne. A trade official says,“we no doubt have significant price advantage over some of our rival countries. But we are finding that our shipping infrastructure is not geared to handle such large volumes efficiently. I am, however, confident that India will be able to maintain rice exports at this level in the next few years at least going by our inventories overflowing storehouses.” Indian rice exports to post gains of at least 3.8mt this season are likely to weigh on futures which posted first annual rise of 4% in three years in 2011 on the Chicago exchange.
But unlike rice, Indian wheat at this point suffers price disadvantage in the world market. This will explain the slow progress of Indian wheat exports. The government put a ban on wheat exports in 2007 and the decision was reversed in September 2011. Trade officials say due to time wasted in removing the ban, the country could not take advantage of high global wheat prices in the early part of 2011/12. Therefore, as India failed to take advantage of the bull phase, it will, according to US Development Agency end this season with wheat export shipments of only 700,000 tonnes. The Agency believes in the event Indian wheat achieves price parity with grains of other origins in 2012/13, then exports could more than double to 1.5mt. The point is once the country completes harvesting the current wheat crop by May, it will be sitting on mountains of stocks. That should ideally lead the country to export 5mt or more. The rider is the government needs to permit exports from its stock and at current world prices with subsidy. The
USDA, however, says “the government is unlikely to subsidize exports of government wheat due to local
political and WTO commitment concerns.” Local production falling considerably short of internal requirements, India remains the world’s
largest buyer of pulses with over 15% share of global imports of the commodity. Annual
imports of pulses, the main source of protein for a large section of Indian population, range from
2.5mt to over 4mt. Production of this highly sensitive commodity being inadequate, the
government goes on extending the ban on exports of pulses on a yearly basis. However, exports of 10,000 tonnes of
chickpeas and organic pulses and lentils have been allowed with certain conditions. As India is to attempt a breakthrough in pulses production technology to keep pace with the rising demand for the commodity, the government is pushing private groups to explore the possibility of buying or taking land on long lease in African countries for growing pulses there for the purpose of their buyback. African soil, even its wasteland is seen to be ideal for growing pulses. Basu says that he has asked Indian Institute of Foreign Trade to prepare a report on the feasibility of Indian private sector venturing into pulses production in Africa. The government will have to work out the ideal institutional mechanism to extend sovereign support to private parties acquiring farm land abroad with guaranteed buyback of harvest. Agricultural scientist Jaishankar says growing pulses in Africa is an exciting idea, “but the process has to be handled with utmost care.” What, however, should help India in this outing is its good political relations with African nations.
“Sugar stands as an outstanding example of how official procrastination at the beginning of the current season (October to September) denied the benefits of high world prices for both raws and whites at that point. Who didn’t know in November– December that India would be producing a bumper 26mt this season on the back of 24.40mt a year ago? The denial of early exports not only stopped us from cashing in on high world prices but it also subject us to price erosion in the domestic market under the weight of high stocks,” says Dhanuka. In any case, New Delhi has so far sanctioned exports of 3mt in three equal tranches. Dhanuka says “there is still going to be enough sugar in our kitty for the government to let us export another 1mt.” Sugar mills are confident that exports of the order of 2mt to 4mt could be made sustainable replacing now on, now off shipments abroad provided a link is established between sugar prices and cane cost.