Let’s hope the adage “it is always darkest before the dawn” holds true because 2016 arrives very dark indeed for many markets.
The year might prove as gloomy as 2015, but a few shafts of light are breaking through the curtain.
Grain market supply fundamentals remain bearish, while prospects for demand and the overall market environment have deteriorated as China’s economy stumbles.
The central government in Beijing is trying to transition the economy from an export-oriented cheap manufacturer that is centrally controlled to a more mature structure that is focused on domestic consumption and directed by market forces. It is also slowing infrastructure development, which has outpaced the actual need.
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That is a delicate balancing act.
China is still growing, but likely at quite a bit less than the official 6.8 percent a year and well down from the almost eight percent growth common in the past decade.
The financial reforms in China are broad, reaching into every sector. In agriculture, the government is slashing its floor price for domestically produced grain, trying to get farmers to broaden their crop choices and produce less corn as a way to shrink the enormous government-owned stocks that have built up.
However, in agriculture policy, as in the rest of the economy, the government must be nuanced with its policy shifts to avoid overreactions that would throw the country into chaos.
People in China are nervous and are pulling money out of their stock markets, which appear to be much more Wild West, speculative affairs than North American stock markets.
The Shanghai exchange fell 10 percent in the first week of the new year.
Such dramatic moves shake investor confidence worldwide, but more fundamental is the very real slowdown in China’s consumption of raw products.
You might remember the Baltic Dry Index (BDI), which leapt into the public’s awareness in the commodity boom of 2005-07.
The index tracks the relative cost of hiring ocean going ships. The rate was soaring back then as the global fleet could not keep up with the voracious demand, from China and elsewhere, for raw materials.
To give you an idea of how China was growing, it produced 6.6 million tonnes of cement in the three years from 2011-13. That was more than the United States produced in 100 years from 1900-99.
Because China had to import so many raw materials, the Baltic shipping index became a measure of global trade and health.
But then it crashed with the global recession in 2008.
Ocean traffic declined but also a host of new ships commissioned during the boom were launched, causing a surplus of capacity. It took a while for the index to establish a new range that reflected the increased capacity.
The BDI began to edge higher in late 2013 and many hoped it signalled that the world economy was finally recovering, but that was optimistic and the index sputtered and dropped through 2014 and 2015, reflecting a global economy that simply couldn’t gather momentum.
As this column was written Jan. 11, the BDI hit a new record low of 415 points, a far cry from its peak in May 2008 when it hit 11,793.
This weak international picture presents a challenging environment for Canada’s export-oriented grains industry.
However, there are bright spots.
The Canadian pulse market is prospering, filling the production gap in India caused by two successive disappointing monsoons.
Also, exports of Canadian wheat and canola are running well ahead of last year’s pace, with canola ahead by 12 percent and wheat (excluding durum) ahead by five percent, thanks in part to the weak loonie.
Agriculture Canada had forecast only a four percent increase in canola exports and figured wheat exports would drop by 9.4 percent.
The canola crush is also running well ahead of last year.
Will these trends continue with the recent stock market turmoil? It is hard to say, but if they do, year end stocks of the two largest Canadian crops will decline significantly.
The benefit will most likely be felt in an improving basis because the futures market will likely be held back by slow American grain exports and burdensome U.S. year end grain stocks.
