Market Morsel: Are we holding onto the dragons tail?

Grain | 22nd October 2020 | By Andrew Whitelaw

Market Morsel

In an early article on TEM, I wrote about why you need to remove China from the calculation when examining global supply and demand (read here). According to many government data providers, China is well supplied with grains.

As a result of poor growing conditions, especially with the corn crop, it looks like China is at the table to buy and the pantry is possibly not as full as government datasets would extol.

At TEM, we believe it is crucial to examine prices around the world, as exchanges tend to follow one another.

In the first chart, the monthly average futures price for Chinese corn (Dalian), US corn (CME) and wheat is displayed (CME). Dalian futures have been on an upward trajectory since the start of the year, and in the last month two months, US futures have started following.

In the second chart, the monthly move for each contract is shown. Dalian futures have only had one month in the negative during 2020 (May). During September, and this far into October CME wheat and corn futures have advanced at a more significant percentage than Dalian.

As we have discussed in numerous previous articles, corn is a major driver of wheat pricing. A large move upwards will flow through very quickly to wheat pricing, and with a huge crop en-route in Australia, we need overseas values to remain supported.

At present China has a low tariff rate quota of 1% for the first 7.2mmt, then 65% for all corn outwith this quota. This hasn’t been removed or increased, which with a massive import program already set in place, this may be reviewed to reduce domestic pricing.

The remove of tariffs/import taxes was yesterday announced by Turkey for now until the end of the year, to reduce potential food inflation.

Tags

  • CBOT Wheat
  • Corn
  • Wheat
  • China