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After going through a long period of relative stability in the world grain markets, there have been some major interventions in the past few years. The combined impacts of these interventions have resulted in more volatile markets and production. Most of these have occurred in the former Soviet Union (FSU), but some of the actions by China also have had drastic impacts.
China is one of the biggest importers of grain and oilseeds in the world. A primary import is soybeans, which is the fastest growing market in the world. However, in recent years, there has been hints and expectations that China would expand its imports of corn.
Meanwhile, China is developing its own grain trading arm known as COFCO, which has acquired Noble and Naidiera (51 percent). Both are important trading entities.
China notably began cancelling corn and soybean shipments in November 2013. In one case, China cancelled because MIR-162, a corn trait commercialized by Syngenta, had not been approved by China, even though it was approved for use in the U.S. in 2010. Previous to November 2013, corn prices had been quite high but started falling going into the 2013 harvest period.
A cancellation is not an exact process, but it is possible to regenerate these inferentially through the use of export sales and shipment data from the U.S. Department of Agriculture. The implications of a cancellation are quite drastic because it involves traders having to change position coverage (typically selling futures or cash that had been bought previously).
As a result of these actions, corn basis values in North Dakota fell sharply. For example, basis values in Jamestown fell from a plus 50c/b corn basis value to a greater than minus 100 c/b under the futures market, which is a 150c/b corn basis value decline, or $60 per metric ton. While there were a number of other complications during this period, the impacts of these cancellations probably were the overriding impact on the market.
Interventions by the FSU have had similar, though opposite, effects. Russia had been a major exporter for many years, but under communist control, it became an importer. As the market began liberalizing in 1991, imports persisted. However, by about 2000, Russian exports were 5 million metric tons and then grew rapidly to 40 million metric tons in 2011 and 2012.
The quantitative significance of this growth is important. First, in some years, the FSU is up to 24 percent of the world trade. This almost compares with adding the equivalent of two times the exports of Canada onto the world market. While typically these exports are targeted to the North African and geographically related markets, they also have penetrated some of the Latin markets. Typically, these are lower protein hard wheats and sell at very competitive prices.
However, these exports have been volatile. Since 2007, there have been three years in which exports were drastically reduced. As a result, prices became volatile and the governments of Ukraine and Russia have intervened frequently. Since 2007, there have been five interventions. Each intervention created drastic increases in U.S. and world prices.
In some cases, the price increase commences prior to the intervention in anticipation of the action. Typically, the price increase is sharp, ranging from $50 to $300 a metric ton, and then it falls sharply.
These interventions have important impacts on world grain markets. First, prices and basis values become much more volatile. Second, there is greater supplier risk on the part of these exporters, which causes a greater risk on importers. As a result, exports from the FSU have to be accrued at discounts. The impacts of the greater basis risk makes hedging less effective, which has implications for all market participants.
Finally, trading firms benefit from this volatility and risk. However, success requires them to create some form of a switching option.
Increasingly, the impacts of these interventions are to require traders to have the ability to ship from alternative origins if or as an intervention takes place. Finally, given the growing dominance and importance of these countries and the underlying reasons for their interventions, it is expected there will be a continuation of such behavior in the future, which has implications on the U.S. and world grain industries.
Source: William W. Wilson, North Dakota State University
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