A crash in the market and devaluation of its currency means the country won’t be looking to buy Canadian commodities
China’s continuing market chaos and economic weakness are dashing the best recovery hopes for the crop markets, some analysts say.
After spending 15 years acting like a white knight and riding to the commodity markets’ rescue, China is now keeping its demand in the stable.
“You have no backstop now,” said Randy Strychar of Oatinformation.com.
“It’s not like there’s another buyer waiting in the weeds.”
China’s slowing economy has been dragging on commodity markets for more than a year, but recent Chinese stock market selloffs and symptoms of financial panic have undermined confidence that its government can simply engineer a speedy recovery.
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China caused currency market chaos when its central bank unexpectedly devalued its currency, breaking smaller Asian currencies in the process.
Then its stock markets went into a tailspin, and the Aug. 24 stock market rout was the worst in China since 2007.
That led to selloffs around the globe as investors considered what continuing Chinese weakness would mean for the global economy.
For commodities, it means nothing good.
China is not only the largest importer of many world commodities but also the source of much of the growth in demand for the past 15 years. This allowed its giant economy to step in to buy up commodities when they became cheap.
Farmers saw an example of this when the European market for flax was suddenly cut off after a genetically modified variety, Triffid, was unexpectedly found in conventional shipments.
Rather than the flax market permanently collapsing and wiping out the Prairies’ Europe-dependent production base, China stepped up and began buying large amounts of flax, presumably seeing it as a discounted vegetable oil.
That phenomenon has occurred countless times, with China appearing in markets and sucking up excess supplies that analysts had been fretting about.
China once played almost no role in the canola market, other than sporadically. Now it’s a major source of ongoing demand, offering more stability for farmers.
Canadian pork has also enjoyed booming sales over recent years, even though there is still a ban on ractopamine-containing pork.
No one is expecting China’s demand to disappear, and some don’t expect it to shrink at all. That’s not the main concern.
Many market observers and analysts have forecasting models in which they have built in Chinese demand growth projections that now seem far too optimistic.
They are now having to dial down those growth projections, which means reducing expected Chinese purchasing of virtually every commodity.
With less drawing pressure on Canada’s commodities, Canadian commodity producers, including farmers and the agriculture industry, will need to push harder to make sales.
And that often means pushing down profitability.
“With today’s costs, there’s no margin left” if prices fall much further, said Brian Voth of Agri-Trend Marketing.
Farmers are likely to see wacky price moves as the world’s currencies bounce around in volatile trade, with the Canadian dollar falling on risk-off days and rising on risk-on days.
That can make charts and nominal dollar prices hard to interpret, when futures prices for canola are listed in Canadian dollars and oats and wheat are listed in U.S. dollars.
Farmers might also see some of the phenomena that occurred around the 2008 crisis.
Investors flee into commodities when they fear tying up their money in stocks or some currencies and flee out of commodities when they fear that the world demand for commodities is disappearing.
“This is the contagion from China’s (devaluation) move,” said Errol Anderson, writer of the Pro Market Wire report.
“It really suggests the commodity world is in a broad-based washout, as is the currency world.”
Analysts were left scratching their heads about what could cause crop futures to recover. The situation was already bearish because of supply and demand reasons before the China crisis.
Mike Krueger of the Money Farm in Fargo, North Dakota, said reduced expectations for the U.S. crop, a major frost and an unexpected increase in demand for U.S. crops could cause a rally if they occurred.
However, all those are unlikely now, which will probably cause many farmers to back away from the market until the chaos clears.
“I just think U.S. corn and (soy)bean farmers are going to put as much (crop) away as they can,” said Krueger.
“They’ll lock the door for a while.”
Strychar said oats are affected by the Chinese crisis, even though little of the crop goes there.
“It’s going to pull everything down, “said Strychar. “The funds don’t just look at oats. They look at a basket of commodities and we’re just one small part of it.”
Like it or not, prairie farmers are now as affected by China’s bad times as they were by China’s post-2000 good times.
