Doud: China Pivoting to Brazil for Corn
Published: Friday, February 3, 2023
Trade and its impact on agricultural commodity prices received top billing during the Great Lakes Crop Summit, as Gregg Doud, chief agricultural negotiator for the Trump administration, gave attendees an insider's look at the world of commodity trading on a global scale.
Doud served with the rank of U.S. ambassador during his tenure, and was one of the primary architects of the U.S.-China Phase One trade agreement. Previously, he had served as president of the Commodity Markets Council addressing global market and risk management issues, was a senior staff member of the Senate Agriculture Committee, helping to craft the 2012 Senate Farm Bill in areas of international trade, food aid, livestock and Commodity Futures Trading Commission oversight. He has also served as the chief economist for the National Cattlemen's Beef Assn. and is a former market analyst for the W.S. Wheat Associates.
"The world has changed in the past 10 years," Doud said, pointing out that the United States, which once dominated world trade and benefitted from being the most sought-after source as a trading partner, has lost that position to China, which has strategically set itself up with significant geo-political influence.
"We've been the biggest corn exporter to China forever, but about a month ago, for the first time ever, Brazilian corn arrived in China," Doud said. "That change was precipitated by Russia invading Ukraine, a leading corn supplier for China."
When Ukraine could no longer fulfill trade obligations with China, the U.S. would have a monopoly on China's corn imports, an unacceptable position for China. Brazilian corn prices and production are currently competitive with U.S., causing an explosion in Brazilian corn production, and potentially surpassing U.S. exports to China as early as 2023.
"Realize that the price of corn in China is $11 per bushel, and a lot of that still has to do with recovery efforts from African swine fever (ASF)."
China is home to 50% of the planet's hogs and is by far the country's protein of choice. When ASF and consequent control measures wiped out millions of the country's hogs, the country made a decision to move away from subsistence hog farms to a system of mega confinement housing and controlled biosecurity as a measure of national food security. Rebuilding a herd of that size requires enormous amounts of corn, a crop that isn't commercially grown in China.
"The size and scope of what China is doing is a really big deal; they are the world's largest importer of corn and going forward will import between 5 and 40 million metric ton annually. That level of import is responsible for the hog prices we are seeing today," Doud said.
Chinese pork prices are extremely volatile due to a continuous cycle of expanding and collapsing production.
"Understand, Chinese farmers have no access to credit at all," Doud said.
When the prices fall, they liquidate, causing the prices to go down even further. Last week, their price dropped to at or below cost of production, so they are liquidating again."
Though Brazilian corn may be competitive against U.S. corn, soybeans are more profitable to Brazil as an export, and all offers to buy corn from Brazil are tabled until June, while they empty their soybean reserves. As a result, Brazilian corn export season will coincide with normal timing for U.S. exports.
"The point is, we are probably going to have higher ending stocks of corn in the U.S., which point to trouble," Doud said. "As for soybeans, we are rapidly approaching a point where China could purchase all their soybeans from Brazil. But for 2022, current U.S. soybean sales are on target."
China refuses transparency with the country's financial indicators, population census and more, claiming a 3.9% growth in GDP which Doud claims to be bogus information.
"The government can't even agree on what the numbers are, and the Communist party doesn't want the world to know what is going on so they've stopped putting out information," Doud said.
One thing is certain in that all the volatility in China and its markets bears on U.S. fertilizer supplies and prices as one-third of the world's fertilizer comes from three Chinese provinces. Russia, Brazil, India and China are beginning to talk and collude on fertilizer.
"If they collude, what does that mean for American agriculture? What happens when they start working outside of U.S. influence? Russia and China have enormous world food influence and what happens to world food if the U.S. is not part of the conversation?" Doud said.
"Capitol Hill is learning very quickly that food security is national security, and that line of thinking is on the minds of those in Congress now more than ever before, since we all had a front row seat to watching food system weaknesses during COVID. There is a strategic component to fertilizer and there is a strategic component to food on this planet."
Since ASF, China has become the largest meat importing country in the world, importing 2.7-2.9 billion dollars' worth of beef, pork and poultry from the world per month. Prior to the Phase one China trade deal, the U.S. sold no beef to China but have sold $2.5 billion worth in 2021, and will exceed that for 2022. U.S. accounts for only 6% of China's beef imports, and last year, Argentina had to stop exporting its beef to curtail food inflation at home.
"China is cleaning the world out of meat, folks, which leads to tremendous opportunity in protein production right here in the U.S.," Doud said. "There is no where else in the world that this stuff is going to come from."
Was there a Phase Two after the implementation of the Phase One China Trade agreement. Doud says no. "Phase Two was really about getting the Communist Part of China to get their tentacles out of business and taking of trade secrets. This was never going to happen," Doud said. "The Chinese are not good at entrepreneurship, but they are masters of reverse engineering. They will continue to copy the world and will never stop insisting on bullying trade partners to share their technology."
In the long run, Doud sees the world breaking up into regional trade cartels. Wildcards in the scenario are variables like oil prices, fertilizer costs, the value of the dollar and interest rates.
Strategic thinking and planning must replace corporate America's penchant for quick profits, noted Doud.
"The Chinese are thinking and planning in terms of decades, while corporate America fights over monthly profit and loss."
Creating greater sustainability with less reliance on imports, especially Chinese goods that are cheap and easily replaced, is the ultimate solution to regaining American trade influence worldwide.
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