Markets

China trumps US sorghum

Owen Goddard, COFCO trader, April 24, 2018

AFTER much speculation, China’s Ministry of Commerce (MOC) on April 17 imposed provisional anti-dumping measures on grain sorghum imported from the United States, effective immediately, the latest development in the tit-for-tat trade war between the two nations.

US sorghum arriving in a Chinese port would attract a charge or duty imposed on top of the commercial value of the cargo; an impost which could be represented by a formula as follows;

Margin amount = (customs duty paid price× 178.6%) × (1 + VAT), VAT=10%, equating to 196 per cent or around US$450/t.

In recent years, China has established itself as the epicentre of global sorghum demand, using sorghum for production of either feed for livestock or the very well-known alcohol (Baijiu).

It is important to note however that China does not necessarily need sorghum as a feed grain, it merely just needs feed grains and will, therefore, source the cheapest alternative.

For sorghum to replace corn as a feed ingredient in China, it needs to be priced competitively against their domestic corn.

Most of the US sorghum destined for China was intended for use as a feed grain.

Chinese domestic corn values are around USD$240/MT so surely there is no point executing these US sorghum shipments into China now.

Markets reacted as trade disrupted

Trade sources suggest that there could be as many as 20 vessels or 450,000t of US sorghum already loaded or loading and destined for the already impacted Chinese market.

Further to this there are reportedly additional deferred sales of around 750,000t also affected meaning a total of about 1.2 million tonnes (Mt) of US sorghum.

To quantify the scale of Australia’s total sorghum production (for those not familiar with the sorghum trade), it will be approximately 1.5Mt this year.

The initial reaction to this news from the Australian sorghum market was positive with local values lifting around A$20/t on the basis that China will import more Australian sorghum.

Reality is that Australian sorghum was already a significant premium to US sorghum landed China ahead of this announcement and Chinese demand already being rationed as Australian sorghum only worked into the alcohol sector.

Feedback from China was that higher priced Australian sorghum would not work, so our values dropped back $10/t.

Regardless of the Chinese demand, Australian sorghum is also rationing domestic demand at current values.

Sorghum is trading at a significant premium to wheat, so consumers are dropping sorghum out of their rations meaning we will have more available for export.

Clearing the backlog

The plot thickens further as speculation mounts about what happens to all the distressed cargoes of US sorghum currently afloat.

Traders with exposure are jostling to find other homes throughout Asia for these vessels, and European homes are being targeted for those yet to load.

Most global destinations already have significant feed grains coverage, so it is proving difficult to find outlets for immediate discharge.

As desperation mounts to minimise exposure and ultimately stop further losses the trade will likely look to discount the value into any destination that can take delivery.

Australia, as a result, is currently being targeted as a potential outlet destination. We are deficit feed grains on the east coast, and the stark reality is that US sorghum would work into Australia at a significant discount to current domestic feed grain values.

It is evident that Australia has stringent biosecurity measures in place to prevent the introduction of plant and animal diseases.

As such, the Australian Government authorities will need to be completely satisfied that the importation of US sorghum does not pose any threat before they would allow this to occur.

 

Source: COFCO

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