AS CHINA and the United States battle it out in their ongoing trade war like a pair of bull elephants, Australia and its international grain trading arrangements risk being trampled in the melee.

That’s the analogy Rabobank’s Hong Kong-based senior Asia-Pacific strategist, Michael Every, draws from the high-stakes trade stoush between the two super powers and warns that Australian grain is potentially in the firing line as “things are going to get messy”.

If the Chinese and Americans currently meeting in Shanghai happen to strike a deal, it could see China buying more US agricultural products, substituting them for those from Australia.

However, Mr Every doubts a deal is possible, and that a protracted impasse is more likely, making the situation even more volatile.

“Yes, the US and China are talking about trade. Yes, there is a risk the US will try to push Australia out in order to get a sweetheart deal. But more fundamentally, our view is there is no trade deal to be done between China and the US,” he said.

“If you look at what China wants to achieve it is ‘to make China great again’. If you look at what (US president) Trump is trying to achieve it is ‘to make America great again’. The two are incompatible. There is no way the US selling agri-products to China and China moving up the value chain and selling high-tech products back to the US is a sustainable basis for the two to both be great at the same time.

“There isn’t going to be a trade deal between the US and China. The best we’ll get is a can-kicking deal till 2020 (after the US election), and then the gloves come off.”

Mr Every said that meant the situation would become much more disrupted and he urged agricultural businesses to plan for a rough ride.

“Markets are going to be volatile. In particular, the US dollar could really get much stronger against both the Chinese currency and the Aussie dollar. The Aussie dollar may tumble, which would make exports more competitive, but the Chinese currency could tumble too,” he said.

If the impasse was to escalate, Mr Every raised the possibility of China insisting its customers, like Australia, be paid in Chinese currency.

“What happens if your Chinese clients knock on your door and ask if you’d like to be paid in renmimbi? They could say they will continue to do business with you, but in order for them to get rid of foreign exchange risk they offer to pay you in renmimbi from now on, which you can only spend back into China, or maybe Cambodia or Pakistan,” he said.

Past the point of no return

Rabobank senior grains and oilseeds analyst Cheryl Kalisch Gordon said even if a trade deal was reached, Australia needed to prepare to operate in a very different global trading environment.

“It has passed the point of no return to a business-as-usual situation. We are looking at a situation where we are exiting a free trade era,” she said.

“We can expect (China and the US) to use the resources they have at their disposal to pursue their ambitions to be the number one in the global trade environment. They will do that at the expense of countries like Australia.

“We are entering an era where there will be a softening Australian dollar as the US dollar strengthens. And we are going to have the volatility that goes with it.”

Ms Kalisch Gordon said, ironically thanks to the eastern seaboard drought, Australia had largely avoided the fallout from the trade war in the international market place.

“So far the Australian grain sector has been quarantined from the impacts of what has been happening globally in terms of grain markets and what has been happening as a result of the US and China going toe to toe,” she said.

“That’s because it has been desperately dry across the east coast and we have been playing in our own home market. That is very unusual for us. We are normally exporting and relying on those global price signals.

“But we reached record basis levels last year and we still sit at above average levels in most ports across the country. We are expecting these basis levels will continue to somewhat soften the blow of what is happening globally.

“The other thing that has helped has been the softening of the Australian dollar. It was only 18 months ago it was sitting close to US80 cents, now it is around US68 cents. For every cent you get about $4/tonne for our grain prices.”

Ms Kalisch Gordon said in the uncertain environment surrounding the China/US trade war, Australia was very exposed with 20 per cent of its global grain exports to China, particularly with barley.

“We have been quarantined in terms of pricing so far, but not exclusively because we have had China announcing an anti-dumping case for our barley last November. Since that has been in play there has been no news of what they are going to do with that case. But it has reduced the underlying price of barley by about 10 per cent,” she said.

Going forward, Ms Kalisch Gordon said Australia needed to realise the world was changing and consider new strategies and marketing opportunities for its grain.

“This is a wake up call to ensure we are always diversified in our marketing end-points. The good thing for Australia is we are already established as a supplier of wheat and barley to Vietnam. So growth in that country is very good for us. We have preferential access to Vietnam compared to the US under the 10-year-old ASEAN Free Trade Agreement,” she said.

“In South East Asia we forecast significant growth in feed grain demand over the next five years. That is good news for Australia given we are close to that region.

“With pulses it can be cyclical and a roller coaster ride in terms of pricing for Australian pulses, but with India doing well and having population growth expected to pass that of China in the next decade, there will be increased demand for pulses.”

Ms Kalisch Gordon said Australia needed to focus on the things that set Australian grain apart from its global competitors.

“The functional qualities of Australian grain, particularly wheat, have always set Australia grain apart for millers. But that benefit is being eroded by the improved quality of alternative suppliers,” she said.

“So, we not only need to focus on the functional characteristics, but the other characteristics Australia can deliver such as reliability, its dryness, its niche provision of specialty grains and higher protein grains.

“At the end of the day, we have to also consider that maybe feeding grain to an animal here in Australia and exporting it to emerging and growing economies might be where a margin is for Australian grain.”