May 22 – Is a New Cold War with China Happening?

Grain markets this morning are mostly red as new political spats between China and the U.S. are weighing on almost all asset classes.

“We are not living in the same world we were immediately after the Cold War, when there seemed to be a greater belief in the universality of human rights and there was enough prosperity to make us question why we had not committed more resources to upholding the values we claimed to hold most dear.” – Uzodinma Iweala (American-Nigerian author)

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Is a New Cold War with China Happening?

Grain markets this morning are mostly red as new political spats between China and the U.S. are weighing on almost all asset classes. Decent growing conditions are weighing on corn and soybean prices, although the heavy rains in the Midwest will likely result in some re-planting. Wheat prices are pulling back after three days in the green, as traders taking profits on average wheat yields in Kansas (via a virtual crop tour) being estimated at 44.5 bushels per acre vs the USDA’s forecast of 47 bpa in the May WASDE. [1] Traders are also positioning themselves ahead of the American Memorial Day long weekend (As a reminder, there’ll be no Breakfast Brief on Monday as the markets are closed in observance of Memorial Day).

While every country in the world seems busy printing money in order to keep economies going, Bloomberg’s news director, Joe Weisenthal, argues that the world’s dependence on the U.S. Dollar may be weakening thanks to COVID-19. [2] More specifically, Mr. Weisenthal states, “more countries may opt to fund themselves in their own currency, seeking stability from global volatility instead of optimizing for growth.”

In that vein, I recently shared my perspective with the Western Producer on the whole currency debacle, noting that if the U.S. Dollar stays strong, it’s not just the Canadian Loonie that weakens. [3] The currencies of other countries like Australia, Europe, Russia, etc. are in the same boat, and therein, all boats fall or rise together; any competitive advantage due to currency weakens accordingly.

Beer, Malt Barley Demand in Rough Shape

As a follow-up to Wednesday’s Breakfast Brief on meat prices & China’s new tariffs on Australian barley exports, China’s beer brewers might be the most upset group. [4] One reach around that the Australian barley market may be able to get away with malting more of its barley and exporting a value-added product instead of just the material. [5] Obviously, this would put more pressure on the domestic maltsters in the Land Down Undaa but it would likely open up some buying. Usually, Australia sends about 3.5 MMT of malt barley to China, whereas their malting capacity only converts about 1.2 MMT of malt barley into 1 MMT of malt. Sidenote: China has now allowed U.S. barley to be exported to the People’s Republic! [6]

This comes as American craft brewers are under the gun of reduced to demand as beer drinks head for classic staples like Miller Light and Bud Light. [7] Put simply, COVID-19 lockdowns have shifted “sales from tap rooms to grocery store aisles”, reports the Wall Street Journal, as the restaurants, bars, & tap rooms that make up 18% of American beer sales are closed. We’re also seeing various events being cancelled, including beer tasting events/festivals and the mother of all beer drinking events, Oktoberfest in Germany has also been called off. [8]

Inherently, there’s a camp of analysts growing who believe COVID-19 habits like online ordering and curbside pick-up of beer will stick once a vaccine is found (and life returns to some level of normalcy). Further, a Brewers Association says that a recent survey of members suggests 60% of the 8,000 craft breweries in North America could close, up from the 5% that the group was initially forecasting. While I mentioned a week and a half ago when I took a look at the best and case scenarios for barley prices in a COVID-19 world, but this gives further perspective on why you’re seeing new crop malt barley prices in the low $4s CAD/bushel.

From a production standpoint, Europe continues to see the negative effects of dry weather, as MARS, the EU’s crop monitory service, continues to lower its yield and production estimates of various crops. For barley, average EU yields are expected to drop nearly 8% year-over-year. More specifically, FranceAgriMer says that, in France, barley crop conditions continue to deteriorate with winter barley now at 51% good-to-excellent (G/E) and spring barley at 62% G/E. At this time a year ago, winter and spring barley crop conditions in France were 75% and 89% respectively.

What does this all add up to? Maybe less malt barley and more exports of feed barley? The problem is that it has to compete with ultra-cheap corn prices for that feedstuff business. Currently, malt barley prices in France are at the lowest they’ve been since 2015 (and it’s not much different here in North America!) [9] With the weaker demand for malt barley, the USDA is estimating that ending stocks in the U.S. will grow by 7% to a five-year high, while inventories in the EU will climb 14% year-over-year to 6.6 MMT.

Comparably, Agriculture Canada’s estimate from April suggests that 2020/21 barley stocks in Canada are expected to be the same as 2019/20 at 1.7 MMT. However, I’m expecting this number to rise with the COVID-19 lockdowns lasting longer than many of us probably initially expected. Put another way, this slowdown in malt barley demand (and malt barley prices) could take 2 more years to work through (assuming we’re not in a COVID-19 locked down state by that time!).

China might help Canadian barley stocks fall, but beer demand could help it increase!

U.S. – China Political Tensions Continue to Grow

Moving equity markets is the continued talk of vaccine research, but a lot of the focus has shifted to the emerging “New Cold War” between the U.S. and China, and the U.S. is not the same country that beat the Soviet Union in the last one. [10] Trust between the two superpowers is the lowest its been in over 40 years, but a new low was reached yesterday when China announced that it would introduce new laws that is supposedly directed at curbing “secession, sedition, foreign interference, and terrorism.” One Hong Kong pro-democracy politician called the bill “the end of Hong Kong”; another called yesterday the “saddest day in Hong Kong history.”

In response, the U.S. government is reviewing new legislation that would impose some serious restrictions on Chinese companies that already are or are trying to list on American stock exchanges. [11] This comes though as it become public that Luckin Coffee, a Chinese upstart designed to compete with Starbucks, had nearly wholly fabricated its sales figures. [12] The same firm that discovered Luckin’s fraudulent ways, Muddy Waters, is now short another Chinese company, GSX Techedu, which they say is completely fraudulent, with the user base for its education services being almost wholly fake. [13]

Further, two U.S. senators, from either side of the aisle, introduced legislation what would punish ANY Chinese company or organization that is involved in enforcing China’s proposed rules of law in Hong Kong, which has been an autonomous city-state since Britain gave it up in 1997. [14] Fights have literally broken out in recent weeks at Hong Kong’s Legislative Council. [15] I don’t know how else to put it other than this is political terrorism as one of the world’s largest independent cities loses its freedom.

With China continuing to encroach on and then claiming various bodies of water in the South China Sea that is literally not theirs, some military event seems, unfortunately, inevitable. [16] Obviously, this looks more and more like the start of a new Cold War. However, the difference being that today’s western world is more wrapped up in “cancel culture”, media posturing, and the economic and political system of the United States government is not producing shared prosperity with its citizens. That said, there is more buzz building to bring manufacturing back to the U.S., and some companies are starting to put their money where their mouths are. [17]

Corn Prices Finding Support in China, U.S. Subsidy

Ultimately, it’s becoming increasingly clear that China wants to dominate the world. [18] That said, it’s tough to navigate this challenge of communism trying to take over the world when China and its citizens are, collectively, the world’s largest commodity consumer. That said, it is certainly early but it appears that China is working on buying more U.S. commodities in order to meet the trade deal obligations signed back in January!

Over the past 10 weeks since the trade deal was signed, U.S. corn and export sales are about 8 times higher when compared to pre-trade war volumes in 2017 over the same period. [19] Similarly, U.S. soybean exports are tracking roughly 3 times higher. Conversely though, China has decided to go away with its annual growth target as their own economy suffers the fallout of COVID-19, meaning there isn’t a lot of demand for other raw materials. [20] That said, corn prices on China’s commodity exchange in Dalian continue to fall to multi-month lows as more import quota waivers are expected and 4 MMT is auctioned off from state reserves. However, about 90% of the corn is from the 2015 harvest! [21}

While the government in China tries to part with its old corn, the U.S. government is focused on helping farmers offset lower commodity prices with the new $19 Billion Coronavirus Food Assistance Program. [22] More simply, the U.S. government says that the fall in corn prices and others from January to April was not market-related and that they’ll help recover half of the decline over that period. For corn, this means 67¢ USD/bushel and for soybeans, its means 95¢ USD/bushel! [23]

However, there’s a bit of fine print, namely your farm is ineligible if it had average revenues of more than $900,000 in revenues in 2015, 2016, and 2017, and if your bushels were already sold before January 15th. Like many others, I think this will subsidy will shut the bin doors again, much like the MFP payments to offset the trade war with China did last year!

Ultimately, there are some major political and economic shifts happening under our feet. There are many concerns that China is using the same playbook that the Soviet Union did in the 70s, spreading the communist agenda, while getting a major discount on commodities (who can forget the Great Grain Robbery in 1972). Quite simply though, China needs food and a hungry population is much more likely to push back on a government.

But given the rise in food stuffs production around the world, there’s many more options to buy from today than there was 50 years ago! Therein, as Ed White of the Western Producer correctly predicts, Canadian and even U.S. farmers should be able to survive a new cold war with China. [24] However, I think that food will play just as large of role as technology in this new Cold War, if not a bigger one.

Have a great weekend!

To growth,

Brennan Turner
CEO
FarmLead
TF: 1-855-332-7653
help@combyne.ag
@Combyne or @FarmLead on Twitter

At 7:45 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.4019 CAD, $1 CAD = $0.7133 USD)

July Corn: -1.5¢ (-0.45%) at $3.163 USD or $4.434 CAD
July Soybeans:  -2.3¢ (-0.25%) at $8.328 USD or $11.675 CAD
July Soybean Meal (per short ton): unchanged at $282.50 USD or $396.05 CAD
July Soybean Oil (cents per lbs): -0.23¢ (-0.85%) to 26.88¢ USD or 37.68¢ CAD
July Oats: -1¢ (-0.3%) to $3.188 USD or $4.469 CAD
July Wheat (Chicago): -8.5¢ (-1.65%) to $5.075 USD or $7.115 CAD
July Wheat (Kansas City): -5¢ (-1.1%) at $4.495 USD or $6.302 CAD
July Wheat (Minneapolis): -5¢ (-0.95%) to $5.13 USD or $7.192 CAD
July Canola: unchanged at $10.596/bu / $467.20/MT CAD or $7.558/bu / $333.25/MT USD

COMMODITY TRADING INVOLVES RISK AND MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS POST. Neither the information presented, nor any opinions expressed, constitutes a solicitation for the purchase or sale of any commodities. The thoughts expressed in this email and basic data from which they are derived are believed to be reliable, but cannot be guaranteed due to uncertainty about future events and complexities surrounding commodity markets. Those acting on the information are responsible for their own actions.

About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.

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