Perspective: Morning Commentary, 02/02/2016

Tuesday, February 02, 2016


February 2 – China tops the headlines again this morning, but with another twist. Newswires report that China National Chemical Corp. is close to reaching a deal to buy Syngenta, a Swiss pesticide and seeds maker. The reports suggest that the deal would amount to the equivalent of $42.8 billion, making it the largest acquisition by a Chinese firm ever. The deal could still fall through, but it is noteworthy that the Chinese company would even be seeking a deal of this size and type.


U.S. agriculture was rocked by a shutdown in corn shipments to China that started in November 2013. Shipping channels were filled with cargoes of corn moving from U.S. shores to Chinese ports prior to that time, but suddenly port authorities began rejecting shipments on the basis that they allegedly contained a GMO trait found in Viptera corn produced by Syngenta. Chinese authorities had delayed approval for the trait, while it had been approved by most other importers of note.


My point is not to argue the positive or negative traits of Viptera. Rather, the entire incident provided insight into China’s objectives. China had advanced policy several years earlier that encouraged its farmers to over-produce corn. It paid high subsidy prices to pull the surplus corn off the market in order to inject income into its rural sector in order to avoid social unrest.


That created another problem. Its livestock producers and processors could not afford to pay the high prices needed to pull the corn out of reserve, which increasingly proved costly to the government. I contend that the government needed to find a way to curtail the flow of cheaper U.S. corn and thus found a way to do so. It later approved the GMO trait found in Viptera on December 22, 2014, but the massive flow of U.S. corn had already been all but halted. The validity of its rejection of the U.S. corn shipments will continue to be argued, but nonetheless we find that the flow of U.S. corn was slowed to a trickle and now a Chinese company is apparently seeking to buy the very company producing the trait that it blocked due to its stated concerns at the time.


What has changed? China has changed its policy toward farm subsidies for the purpose of reducing its costly reserves and moving toward free-market reforms. However, it knows that longer-term it needs to feed its massive population that has a growing hunger for pork, poultry, and to some extent beef. It produces more than half the world’s hogs, necessitating a lot of feed grain and protein. Corn supplies may be abundant now, but the pendulum will swing back the other way. GMO seeds may not be popular among its people, but Chinese officials know that they must utilize available technology to make sure its people have the food that they want at an affordable price down the road. They are seeking the genetics they believe is necessary to do so.


China is the world’s most populated country. The rate of growth of its economy is slowing, but it is still growing. Its demand for basic commodities that fuel an economy is slowing, but its demand for food-based commodities remains strong, with soybean imports continuing to set records at an exponential pace. Ample supplies and currency exchange rates are shifting some of that business to South America this year, but now the challenge will be to see if tight credit and existing infrastructure will allow Argentina and Brazil to keep up with that demand. The land resources are there, but the real battle longer-term will likely come down to currency, credit and infrastructure, as well as China’s race to catch up with crop production technology.


For today, the dollar is again testing the bottom of its winter channel and crude oil is again leading the broader commodity sector lower amid lingering economic fears. That created significant headwinds for the Ags on Monday, and is today as well, although they continue to try to swim upstream on ideas the bearish fundamentals are already priced in for now.


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