VIEW FROM THE INDUSTRY: WHEAT AND CORN PRODUCTION, PROTECTIONISM, IMO AND MORE

Interview with James Colquhoun, Senior Grains Pricing Specialist, S&P Global Platts 

Published September 2018

Macro 

What do you see as the two most important issues globally currently and why? How will these impact the market?

The first important issue is climate change. Without proper environmental safeguards to minimize CO2 emissions, we risk disrupting and altering our ecosystems on which we rely to bring ourselves consistency and predictability. Without appropriate rainfall amongst other key ingredients for heathy growth of grains, production levels will likely decrease, especially in the longer term. When coupled with growing demand due to population increases, prices risk becoming incredibly firm and unmanageable, especially for the least advantaged.

The second major issue is the trend towards protectionism. The likely result of protectionist measures is an increase in input costs for businesses, which may result in higher prices for the consumer, subsequently leading to an increase in inflation, especially if demand is inelastic for the commodity in question. Some producers may absorb these shocks in the short term, squeezing margins of both sellers and buyers but may struggle to operate efficiently in the longer term. 

What impact will current market conditions have on market fundamentals for the next marketing year and production in your region? What are the implications for grain and oilseed pricing?

In terms of Black Sea wheat, an expected growth in demand coupled with forecasts of a smaller supply than the previous two marketing years will likely see prices strengthen into Q1 and Q2 2019.

In terms of corn, growing trade tensions between the EU, China and US could weigh on prices from the Ukraine. Fewer outlets for US corn will likely push sellers to satisfy demand in other markets such as the Middle East and North Africa, for example. Ukraine could cover any additional demand coming from the EU or China but this depends on whether stocks will be drawn down or if other big players such as Brazil can be more competitive into those markets.

What do you think has been the biggest change in the grain and oilseed industry over the last 24-36 months?

The biggest change is perhaps the rise of protectionism with US grains bearing the brunt of the measures.

Weather

What effect is/will the weather have on grain and oilseed prices?

An extremely hot weather across Europe, the Black Sea and Australia has negatively impacted wheat yields globally for concurrent harvests. This led to a sharp increase in prices through July and into early August.  With demand set to be higher than previous years, prices are likely to firm over the course of the marketing year.

Essentially the weather will determine how supply fundamentals work. Disruptive weather can also slow logistics. For example, a heavy winter could freeze rivers in Ukraine for long spells, slowing an increasingly important internal transhipment mode.

Regional

What can we expect from the Black Sea region going forward and how will it affect the global grain industry?

We can expect Russia to remain the number one exporter of wheat. Changing climate conditions, which facilitate more winter wheat sowing, in other words, higher yielding crops, ruble-dollar weakness amid US sanctions on Russia and declining macro-economic conditions and workable arbitrage routes across the globe, will sustain Russia’s position as the leader. Other major exporters of wheat such as the EU and Australia will struggle to maintain their current levels of exports as a result.

Do you think that as China is buying more soybeans from Brazil, Brazil will be forced to export less to Europe?

Prices will dictate to whom Brazil sells its soybeans. The destination with the highest bid will receive the soybeans. Stronger ties between China and Brazil would suggest a preference towards China but with EU-Mercosul negotiations progressing well, that picture could change.

Freight

What are the major issues affecting the pricing of grain freight?

The key issue to look out for is the 2020 global sulphur limit imposed by the IMO. This could significantly raise the cost of freight.

Where will the opportunities lie for traders, producers and end-users?

This could close particular arbitrage routes from Russia to distant destinations such as those in the Far East.

Technology & Innovation

What impact do you think technology is having on the industry?

Blockchain is becoming more important, prospectively reducing the amount of (legal) paperwork required for contracts. This could expedite transactions and settle disputes far more quickly.

About you

How did you get in to the industry?

I have always had a strong curiosity about agricultural markets. In my degrees I focused on agricultural trade negotiations. In previous posts I focused on the effect of commodity prices on deforestation in Brazil. By embedding myself further in the industry, I have acquired a clearer picture of how agricultural markets function.

If you weren’t in the grain and oilseed/agriculture industry, what industry would you have gone in to?

I would most probably be working in the environmental industry.

If you could take 3 things to a desert island that are not practical (ie. a boat, rope or a knife); what would they be?

A jeep, a surfboard and a guitar.

You can hear more from James at Global Grain South America, taking place on 12 - 13 September 2018.