I had a blast at the Hyatt Regency in Chicago this past two days, where the 2nd Annual Global Grain North America was held. The objective of the conference, “to provide with a strategic outlook on North America’s physical and financially traded grain markets” understates the amount of amazing information I was flooded with during these two days.
Topics covered included grain production outlooks from the major producers’ areas in the world: United States, South America, China and Black Sea region. The major issues of concern were touched by world class professionals and experts in their fields/region of the globe and their willingness to share their valuable knowledge was remarkable to me.
From the Black Sea region perspective lots of things are going on with Ukraine for example, which is a country devoted to Agriculture, a big cereal exporter in the world and with logistics access to the Black Sea. The political divisions are causing lack of cash flow and from a risk management perspective trade routes might be of high interest for countries like Russia. Weather is always important for grain production but at this point, political risk seems to be the high priority. Is the rest of the world grain industry worried? Maybe a little more during the Black Sea’s region harvest time, one delegate pointed.
In the United States, where Uncle Sam has managed to keep slow but consistent economic growth after the 2008 economic crisis, the concerns for the grain industry seem to be related to events that we cannot control such as weather. Weather conditions vary in different areas of the country and might affect/benefit crops depending on the area. In the harvest time, the distribution of the stocks might pose logistic concerns. U.S grain exports, just like economic books suggest, rely on the importers countries necessities (demand).
For China some people would agree that the increase in number of the middle class is translated to increase in global grain demand, and personally I would go along with this thought. Today China enjoys more an open a diversified grain industry, where you can find state owned companies, foreign companies and private domestic companies. Apparently, the corporate farming phenomenon is not happening just in the United States, in China small farmers are moving to the cities and sometimes government will help them to, then farms are becoming more concentrated and probably more efficient. It was interesting to listen Chinese delegates concerned about the infrastructure in Brazil, a country where they import a significant quantity of soybeans and other grains from. Does this mean Chinese grain industry is aware that they are not self-sufficient to fulfill their grain necessities? Not sure, but what I am sure is that China is mitigating some risk related to their suppliers’ infrastructure with some investments in countries like Brazil. Canada might have some important lessons to teach ROW, with their government, industry and growers all engaged trying to improve their logistics and infrastructure.
So in Brazil, similar to China the farmers’ new generations might not want to farm anymore and are migrating to the cities which might be causing an increase on the potentially more economically efficient large-scale farms. I would generalize this case for other important grain producers like Argentina. Political risk is present in South America, where some governmental actions include controlled currency policies and unexpected establishment of quotas. So, if the government comes today and restricts the wheat exports, what will happen to the already transacted product through future contracts? Large and financially stable producers hedge against risks like inflation by holding grains. Logistics are a big concern in South America and Brazilian delegates see this as an opportunity, while countries like U.S. work towards saving cents in production costs, Brazil works towards saving dollars, they said.
Regarding the meat industry, Mr. Randy Blach (CEO at Cattlefax) expressed that the historical decrease in the number of cows in the U.S., the largest producer of beef in the world, might be offset by productivity gain per head. The U.S. is also the origin for one third of the world’s pork and poultry. Interesting enough, China, the biggest meat producer in the world does not appear to be exporting their meat, but importing even more. So increases in world demand for meat create challenges and opportunities for the global grain industry. However, this will or is already challenging other areas such as market access, transportation, financial regulations and trade regulations.
Across all these nations, exchanges have played an amazing role in mitigating risks in the commodities sector and as price discovery centers. But wait, is that the only thing that exchanges do? While it is true that futures markets and options are invaluable risk management tools for sellers and buyers, there are other players called speculators. The objective of speculators in the market is to make money, which is fair to me. Additionally they provide something we called liquidity to the market which is simply “enough buyers and sellers”. But speculators are not something new and the hot topic in New York and Chicago are what Michael Lewis calls “Flash Boys”. In fact when on my way back from work this week I stopped at the Chicago Public Library to check out his most recent masterpiece called “Flash Boys: A Wall Street Revolt” I could not find any available, but what I did find was a waiting list of over 150 people for that specific book. Anyways, High Frequency Trading (HFT) refers to the speed in which an individual is able to make transactions. From my very deep ignorance about this issue, I would say then, it is related to how fast can these so called flash boys process/take advantage of information. One question would be, is it unfair if you are faster than I? I do not have the answer for that question, but what the folks at the conference were positive about was that there might be some actions to take to make sure the market is honored all the time.
I would like to give special thanks to David Lehman and Thomas Merriman both at CME Group, for their comments and insights regarding this article.