Interview: Roaring grain demand top concern, supply curbs take backseat: FAO economist

New Delhi — The global grains market, which saw a price rally across all major commodities in 2020 following an unprecedented supply-demand scenario, is more likely to be driven by the insatiable hunger of key grain buyers in future while supply restrictions become less relevant, Abdolreza Abbassian, senior economist at the Food and Agriculture Organization, told S&P Global Platts in an interview.

"I'm not so concerned at this point in time with issues on the supply side, my biggest concern actually now is on the demand side. Grain demand is surprising us in certain aspects," Abbassian said.

At the beginning of the coronavirus pandemic, people worried that grain demand would plunge like the manufacturing and other sectors, but it remained strong and the agricultural system proved its resilience, he added.

China, which is in the driver's seat of the global grain demand rally, shows huge potential to remain as a key importer going forward as well, according to Abbassian.

"Given the recent behavior of China in the global markets in terms of its big purchases and given the potential for China's economic growth -- the recovery from COVID and African Swine Fever -- chances of China remaining a very strong importer, particularly for corn and soybean, seems much higher than projections," Abbassian said.

"I think there is this sentiment that although we may not be seeing such huge imports of corn repeated every year, but imports exceeding the Tariff Rate Quota (TRQ) could be very much in the horizon."

The US Department of Agriculture sees China importing 24 million mt corn in 2020-21, sharply higher than the 7 million mt imported in 2019-20. China has a TRQ for corn imports of 7.2 million mt, of which corn imports in the country attract a 65% import duty.

China's wheat import is estimated at 10 million mt, the highest in more than 25 years, while soybean imports are seen at 100.33 million mt in 2020, up 13.4% on the year.

China has bumped up grain purchases following recovery in the country's pig herd and is seemingly stocking up inventories.

Recently, the country announced it is aiming to increase the area under corn planting to support higher domestic production.

"The production in China -- although there is an enormous scope for increase in yield -- is a slower process that one would expect. And it may be very difficult for China to keep pace with its own demand only through domestic production," Abbassian said.

Structural changes in China's animal production system also suggest a rise in the country's import demand, according to Abbassian.

China has invested a lot in its animal production sector, and thus is going to need good quality feed grains and reliable trade partners, he said.

Volatile trade policies

The pandemic saw many countries buying more grains while a few placed export restrictions to safeguard domestic supplies.

"On the export side, countries are limiting exports, or putting export tax for economic and domestic food inflation reason, while on the import side, the fear that tomorrow supplies may shrink, or prices could go up led to stockholding beyond needs," Abbassian said. "The revival of these strategies is worrisome."

Abbassian added that the possibility of food nationalism and restrictions continuing in the longer term could not be undermined.

Many big grain exporting countries like Ukraine, Russia, Argentina and the EU have put certain restrictions on shipments.

Ukraine has decided to limit corn exports in 2020-21 after calls emerged for curbing supplies to meet domestic requirements. Argentina has placed a daily export cap on its corn exports.

Russia recently confirmed it will impose a "floating tax" on its wheat and other grain exports starting June 2, adding to trade measures taken earlier, including an export quota and taxes that came into effect Feb. 15 and will run through June 30.

Russia is the largest wheat exporter globally, and following the export curbs, area under Russia's spring wheat crop could see reductions, according to Abbassian.

"Some farmers may shift a little bit during spring wheat planting, but I think there would not be huge alterations," he said.

Impact on trade

The recent export restrictions from Russia and other countries may not impact the global grain trade on a large scale, Abbassian said.

"World [grain] prices are responding more to actually either unexpected demand that was not factored in, or other factors such as the US dollar," Abbassian said.

One of the factors this season that may help overcome the downside around Russian wheat export slowness is an exceptionally good crop from Australia, according to Abbassian.

He added that export restrictions may claim nearly 2 million mt from Russia's exportable wheat supplies, which is not a big concern for markets.

Australia is expected to produce 31.2 million mt wheat in 2020-21, up 105.6% year on year as it bounces back from a prolonged drought.

Abbassian noted that if Russia decides to stay away for another year then it might affect wheat prices globally.

"In the next season, if Russia stays away or for one reason or another and does not export [wheat] in the first few months, well, we could certainly see more support to prices," he said.

"So I wouldn't bet on it, but given how things are, and assuming that the Russian wheat crop will not be affected by unfavorable weather, probably the measures will be quite subdued and not so important."