The views of analysts that world grain prices are bearish simply because they are declining in the US’ Chicago Board of Trade (CBOT) may not be entirely true.

Price movements in the Black Sea region have been quite the opposite of what transpired on futures exchanges. US leadership in agro trade is on the decline and other origins are asserting themselves. This is borne out by some recent developments.

WHEAT DYNAMICS US share in world wheat trade has declined to 20 per cent from 30-35 per cent in 1990-2008. In recent times, the Black Sea nations of Russia, Ukraine and Kazakhstan have been the largest single bloc of wheat exporters of about 35 million tonnes (mts) while the US share is around 28-30 mts out of the world’s total volume of 140 mts.

Egypt, the world’s largest wheat buyer (10-12 mts per annum) is heavily dependent upon Black Sea Wheat (BSW), as are other nations in Africa and West Asia. The Far-East gets its wheat from Australia. Since 2011, Indian wheat export of about 5-6 mts has been competing with Black Sea and Australian wheat.

US futures exchanges, CBOT and the Kansas Board of Trade (KBOT), are no longer “reliable” platforms of price discovery. The high speculative interest of hedge funds in futures trades distorts evaluations. The price trends (bullish or bearish) indicated by these exchanges are disregarded by other origins.

During the last quarter of 2013, the values of US’ Hard Red Winter (HRW-12 per cent protein) wheat, which is comparable to Indian wheat and tracked by KBOT, plummeted by $45/mt ($290 fob), while Black Sea quotes climbed up by $45/mt from $250 to $295.

From India’s export perspective, Black Sea values are more relevant than what is happening in the US or its future exchanges. Moreover, Indian fob export price has to be compared with the landed cost (CIF) of the nearest origin — the Black Sea or Australia.

The US is the world’s largest producer of corn — about 350 mts. It had a share of 60 per cent share in world coarse grains in 2000-08 but that is now down to 40 per cent.

Recently, China “rejected” about 600,000 tonnes of US corn on GMO-related aberrations, though China requires about 5 mts maize this year.

The US or its sellers cannot muster the courage to drag China to international arbitration or the WTO for destabilising the market for fear of jeopardising future business.

After all, China imports 65 mts of soya bean, mostly from the US.

Discarded corn cargoes are finally offloaded in Japan, South Korea, Indonesia and elsewhere at a discount. Perhaps to firm up CBOT prices, the US Department of Agriculture underplayed corn yield in its monthly report dated January 10, 2014.

Corn exports from Argentina, Brazil and Ukraine of 20 mts each acted as a dampener on US prices. It is this trio that determines world’s maize prices, rather than the CBOT.

The irony is that the US has supported higher GMO corn production in these very South American countries from whom they are facing the heat. India’s corn exports, too, are calibrated on the basis of this trio, and not the US.

RICE TRENDS The US was never a frontrunner in rice trade, whereas India is. Surprisingly, the US and Pakistan are on the same footing on rice production and exports. Both produce about 6-7 mts of rice each, and export about 3-3.5 mts. This is in contrast to India’s export of 10-11 mts (25 per cent of world trade) and about 7-8 mts each by Thailand and Vietnam. Global rice trade is expected to reach 40 mts for the first time, from about 38 mts, because of China’s additional demand, to be serviced mainly by Vietnam.

Three factors are responsible for Indian supremacy in rice trade — the populist but unfriendly Thai trading policies, the demand pull of basmati rice from Iran, and the switching of Sub-Saharan consumers from traditional foods (cassava and millet) to rice, which is viewed as a ‘fast’ food because of its shorter preparation time. The expansion in African price-sensitive markets has been supplied largely by India and Vietnam.

Rice trade is linked to the processing of paddy, packaging, and blending rather than bulk shipments. It is labour-intensive. The participation of the US in the rice trade in a big way is difficult.

Lower world prices of wheat and corn do not spell good news for Indian exports. However, basmati rice export — which is growing — is a high value addition item. Non-basmati rice export will depend upon Thailand’s ability to sustain its financial and economic mismanagement. The influence of the US here is marginal.

( The author is a grains trade analyst. )

Related Topics