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Gong xi cai, gan bei, cheers to sorghum in the Year of the Dog

by Tim Murray, 20 February 2018

MILLIONS of people around the world are currently celebrating Chinese New Year, which officially commenced on 16 February. This year marks the Year of the Dog.

Grain traders and farmers alike often have years that we refer to as “dogs”, but a quick Google search shows that within Chinese culture, the dog is the symbol of loyalty and honesty.

Now if the Chinese are being loyal and honest there is no doubt they will be busy consuming copious quantities of their local firewater, baijiu, an alcoholic beverage distilled from fermented sorghum.

So, while the Chinese and many of their descendants throughout Asia take a break to celebrate their New Year, it gives the rest of the global grain trade an opportunity to digest what’s driving grain markets. With harvest under  way in some areas of Australia’s sorghum-growing regions, it’s timely to look at what is influencing the sorghum market.

China has established itself as the epicenter of global sorghum demand, using sorghum to produce feed for livestock or for their famous alcoholic spirit, baijiu. For sorghum to replace domestic corn as a feed ingredient in China, it needs to be priced competitively against their domestic corn. The scale of China’s domestic corn stockpile is well documented too, so sorghum isn’t always a viable alternative. China has its own domestic sorghum production, but demand will at times outweigh supply if prices permit, resulting in significant volumes being imported from the United States (US) and Australia.

Bullish factors

On 5 February, the Chinese Government initiated an anti-dumping investigation on US sorghum. Current assumptions are that US cargoes already booked will be allowed to execute, but no additional business will be done as proposed tariffs will prohibit further imports from the US.

On 13 February, ABARES released its 2017-18 sorghum crop estimate, pegging Australian production at around 1.5 million tonnes (Mt). ABARES noted that prospects for summer-crop production have deteriorated over the past two months, and these unfavorable seasonal conditions were also expected to restrict the planting of grain sorghum late in the planting window, particularly impacting Central Queensland.

The combination of these factors has us all pondering the potential outcome for Aussie sorghum. With a crop of around 1.5Mt, and strong domestic demand, we question how much of an exportable surplus Australia will have. Domestic price spreads between sorghum and white grains will have a significant bearing on what our final export task is, but it is conceivable we could still have an exportable surplus of roughly 500,000t. Given we don’t compete into other more traditional markets at current prices, it is also evident the only place Australia can go with its export surplus is China.

Local sorghum values have rallied around A$30/t on the back of China’s anti-dumping investigation on US sorghum. If we are to see China import sorghum from Australia, it would have to be for baijiu production, as current Australian sorghum values do not price into China for feed use against Chinese domestic corn values. China’s imports of Australian sorghum for baijiu production are estimated to range from 200,000-500,000t.

The question must therefore be asked: Have we seen the traditional Chinese New Year’s fireworks flow over into the Aussie sorghum market ahead of the actual CNY celebrations commencing, or will China come back in a more meaningful way once they awaken from their baijiu-induced coma?

Source: This week’s Nidera market commentary was contributed by COFCO International sorghum trader, Owen Goddard.

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