Fei Zhonghai: supply and demand situation and Price Prospect of Major Agricultural products in 2016

This article is a transcript of the speech made by Fei Zhonghai, a famous commodity research and trading expert, at the Global Financial Market Outlook 2016, jointly organized by the RMB Trading and Research Forum and Tianfeng Securities on December 13.

Hello everyone! I would like to briefly explain my core point of view and main logic to you. As we all know, the basic pricing of commodities is divided into several levels, one is the currency, the US dollar index we mainly set, and the currency movements of the major producing countries of the related commodities. We all know that a bull market in the dollar index corresponds to a bear market in commodities, which is the first logic. The second logic is that we all know that crude oil is the blood of modern industry, and the price of crude oil is actually a basic pricing yardstick for various commodities. we have seen crude oil plummet all the way since September 2014, from $130 to $30, down nearly 80%. The third is the supply and demand of the commodity itself. We know that the production capacity of commodities has been increasing in recent years, mainly because when commodities were at a high level in the first five years, the investment was very large, and production capacity was released one after another over the past few years. At the same time, the demand for commodities, especially in countries like China, has experienced a relatively large recession, and these factors form a basic logic for a very obvious commodity bear market.

Agricultural products are special compared with other commodities, but they are consistent in the overall price trend, and they have also experienced a relatively large decline. This is the overall point of view of several commodities we are going to elaborate today: first, we believe that corn, wheat and soybeans are still in a bear market, and the core of its future task is to continue to decline to reduce area and inventory. Only in this way can a new balance of supply be achieved. Oil and sugar have entered the high point ahead of time and experienced a relatively large decline. At present, from the oversupply to the state of supply-demand balance or tight balance, we think it is a long configuration from the trading point of view. Next, let's tell you the main logic of the goods.

soybean

This is a picture of CBU soybeans. It is the last variety of agricultural products to reach a high point, appeared on September 4, 2014, from 1780 cents to now 850 cents, basically "halved", why has experienced such a big decline? It is clear from the global soybean balance sheet that global soybean production has increased for five consecutive years, from 240 million tons to 260 million tons, and consumption has also increased, but its growth has not kept pace with the increase in our production. So our stocks continue to increase, which is the basic situation of global soybean supply and demand.

The first main factor is that the planting income is particularly good, and the second is that due to the progress of science and technology, the unit yield still achieves a very good record level even in not very good weather conditions, and another is that the overall weather is very good. In the course of these five years, especially the weather in the United States in the past two years, it can be said to be very perfect. Before, many of us thought that when El Ni ñ o came, was it a great impact on agricultural production? In fact, this is a misunderstanding. Judging from the year in which El Nino occurred, South America and North America, including the Asian continent and China, all have the climatic characteristics of abundant rainfall, which is beneficial to the growth of agricultural products. Under the influence of these factors, soybean production in the United States and around the world is increasing all the way.

The focus of global soybean consumption is still China. We know that the most important thing for soybeans is to make feed and protein raw materials. After soybean pressing, soybean oil is a major variety of edible oil, and soybean meal is a major variety of feed. According to our comprehensive statistics, although the growth rate of China's protein demand has declined in recent years, it is still increasing at an annual rate of about 3%. Among them, due to the reduction in the cultivation of rapeseed, cotton and peanuts in China, the demand for soybean meal, the most important raw material for protein, is still increasing. We expect China's protein demand to grow by 3.6% from 2015 to 2016, and the demand for soybean meal will increase to 6% next year as China's stocks increase. In other words, China's expectations for soybean imports are still very good, and consumption is still very exuberant.

This is a balance sheet of Chinese soybeans. China now consumes nearly 100 million tons of soybeans, but most of us rely on imports. The output of domestic soybeans has been reduced from 14 million tons to 9 million tons, which can only be eaten normally. Make soybean products and soybean milk. Judging from the data we have now, about 20% to 30% of genetically modified soybeans are mixed in, and the price difference is about 500 to 600 yuan. Don't think that the soy products and soy milk we eat are non-genetically modified. In fact, this is not the case. Illegal manufacturers have mixed a lot of genetically modified soybeans. Therefore, we are very dependent on the import of soybeans. Soybeans are the largest commodities in Sino-US trade, one is soybeans and the other is airplanes; they are also China's largest imported agricultural products, importing about 80 million tons a year, and are expected to import 81 million tons this year and 84 million tons next year. Therefore, in terms of a single variety of soybean, China's demand is still in a relatively strong state, and China is also a focus of global soybean demand. Global demand for soybeans has increased by 50 million tons in the past five years, with China accounting for about 27 million tons.

There are three major suppliers of soybeans. North America is the United States, with an annual output of about 100 million tons, South America is Brazil and Argentina, Argentina's output this year is about 100 million tons, Argentina is about 58 million tons, what is the state of Brazil now? First, sowing in Brazil is now almost over this year, with a sowing rate of 92%, which is about the same as the five-year average, which means sowing is normal. The second is that the area of Brazil has increased by about 4% this year. Why does the area of Brazil increase? Because you can see that Brazil's real depreciated by 80% in 2015, which led to a rapid decline in Brazilian planting costs, so the income of Brazilian farmers growing soybeans is very good, so its area has increased by 4%. Judging from the current state, the weather in Brazil is very good and generally ideal, with more rainfall in the south and slightly less rainfall in the northeast, which may be a hidden worry, but generally speaking, the weather is good.

There is another problem. We have noticed that in Brazil this year, because domestic gasoline and diesel prices have risen very much, soybean prices have fallen, and chemical fertilizer inputs have dropped by nearly 7% compared with previous years. This may be a problem for Brazilian soybeans in the future. But in any case, at the current price, Brazil's enthusiasm for growing soybeans is still very high, and it is difficult to reduce the area.

This is the data of Argentina, the current planting income has dropped the cost, but Argentina is a very strange country, the official exchange rate is 1 dollar to 9.5 pesos, but the private exchange rate is 12.5, the private real exchange rate is about 40% lower than the official level, so Argentine farmers use soybeans as gold reserves and as a hard currency. Therefore, Argentine farmers have not sold soybeans and have not sold 15 million tons of soybeans in recent years, which is a barrier lake for the global soybean export market. Recently, an opposition party in Argentina came to power, first, to abolish export quotas on corn and wheat, and second, to reduce export tariffs on soybeans, corn and wheat from 35% to 25%. This has led to the devaluation of the Argentine currency and the change of policies, which has had a tremendous impact on the global export market, so this year Argentina exported 8 million tons more than in previous years, forming a huge competition for US soybeans, while the United States exported 6 million tons less soybeans this year than in previous years, that is to say, Argentine and Brazilian soybeans have a very great competitive advantage over the United States in the global soybean market. Because Argentine farmers have lost money growing soybeans, and if the transportation channel is not very unobstructed, then the income will be greatly affected. It is expected that the soybean area in Argentina will decline next year, that is to say, the current prices and policies in Argentina have begun to play a role in reducing the area.

This is the data from the United States. At the current price, the CUB price of 850 cents, American farmers are starting to lose money. According to this year's per unit yield and harvest, its cost is basically 10 US dollars, or about 1000 cents.

We expect that in the current state, if prices do not rebound, the size of the US could fall by about 2 per cent next year, or 1.5 million acres. We look at the current export situation of the United States. As mentioned just now, in the FOB market, US soybeans are 20 to 30 US dollars more expensive than South American soybeans, so the situation of US soybeans this year is very bad, and exports are very mediocre.

According to the US soybean balance sheet, although it is said that the area of US soybeans will decrease next year, because the gains of American farmers in the first six or seven years are very rich, even if they are losing money at present, we do not think that US soybean production will decline significantly. In other words, the stock of soybeans in the United States will remain high next year. Therefore, judging from the current situation in these three major producing countries, we think that the bear market for soybeans is still in progress. I personally think that there must be more than two planting seasons to continue to reduce the area before we can see the position of the bottom of soybeans. So our overall view on soybeans is bearish. If there is no weather problem, we think that any rebound of more than 5% should be a better place to let go.

According to historical comparisons, we think that the relationship between supply and demand now is very similar to that in 1991. We see that this black line is from this year, and we see that the red line above is from 1991. What are the characteristics of the past few years? That is, the trend of inventory increase for the second year in a row, which we think is very similar to that in 1991. What are the characteristics of the trend in 1991? After reaching a high in early December, it fell all the way to June of the following year. This premise is that as long as there is no problem with the weather in South America, Argentina and Brazil, and if we expect production to materialize, we think it will fall all the way. However, agricultural products have a very special situation, and the weather disturbance is too strong, so we should pay close attention to the weather problems in Brazil and Argentina. But in any case, we still think that soybeans are in a bear market, and the road to bottom of soybeans will be very long.

Oil and fat

Soybean oil and palm oil have both agricultural properties (supply side), but sales have industrial properties, both edible and biodiesel uses. Soybean oil and palm oil reached their peak on February 28, 2011, which is basically consistent with the time when we reached the peak of colored and black. Rubber, cotton, soybean oil, palm oil, they enter the high time is very consistent, soybean oil, palm oil high is February 28, 2011, a total of 55 months down, very much in line with a technical sequence. The worst of soybean oil and palm oil is over, and absolute lows may have been seen, with supply and demand shifting from a serious oversupply to a balance or a slight gap. So we think it may be a better, in all the goods are relatively bearish, it is a better long configuration of the situation.

Let's look at the basic supply and demand of oil. There are a total of nine categories of oil, the largest is palm oil, more than 60 million tons, the second is soybean oil, more than 50 million tons, the third is rape oil, 22 million tons, the fourth is sunflower oil, 15 million tons. These four are the biggest.

Sunflower oil and rapeseed oil are called high-quality oil. from their balance sheet, that is, output, we can see that both sunflower oil and rapeseed oil decreased production last year, so their overall inventory and supply and demand situation is tight. We can see that the FOB comparison of oils and oils shows that the prices of low-grade and high-grade oils are constantly opening up, and the supply is relatively tight. In other words, of the four oil products, two high-grade oil have been in a state of blowout in the past two years.

This is the balance sheet of global soybean oil. What about soybean oil? Soybean oil in recent years with the increase of soybean products, with the improvement of the level of pressing, production is increasing, while consumption is also increasing, but the increase in output is higher than consumption, so the stage inventory ratio is constantly increasing. But in 2015-16, global food consumption increased by about 1.9 million tons, and global production increased by about 2 million tons. At the same time, the consumption of soybean oil as biodiesel in the United States, Brazil and Argentina increased by 400000 tons. For the first time, we saw a scissors gap between supply and demand of soybean oil this year, that is to say, demand exceeded supply, and stocks began to decline. Globally, including China, we believe that soybean oil is relatively tight, especially recently that the United States Energy Administration has to adjust its bioenergy policy. It is necessary to increase the proportion of soybean oil to biodiesel, which will increase the overall consumption of soybean oil. Including the way it subsidizes, it may begin to directly subsidize producers, which will stimulate the consumption of soybean oil in the United States, so we think that soybean oil is relatively tight.

The greatest impact is palm oil, mainly two producing countries, one is Indonesia, the other is Malaysia, the two countries add up to nearly 50 million tons, Indonesia is about 33 million tons, Malaysia is more than 20 million tons. In recent years, we have seen a continuous increase in palm oil production since 2011. the main culprit is palm oil, and production has increased very fast. Indonesia and Malaysia have expanded palm tree planting on a large scale in the past two years. Capacity continues to release, food consumption continues to increase, but due to the fall in crude oil prices, palm oil increased very slowly, and even declined briefly last year.

What's happening now? We have seen the impact of the strongest years of El Ni ñ o on palm oil production, the two strongest in history. Malaysia's palm oil production has generally been reduced by more than 10% in the year after El Ni ñ o. This year is a very strong year for El Ni ñ o, which is very close to or even exceeds the level of 1997.

Does El Ni ñ o have a greater impact on the production of Nigeria and Indonesia? this is our statistics of rainfall in Malaysia and Indonesia. We have seen that since March, Indonesia's central region, that is, Java Island, which accounts for about 50% of Indonesia's palm oil producing area, has seen a marked decline in rainfall, especially in July, which has dropped by 60% compared with the all-time low. Malaysia has seen a large mean deviation since February. The production of palm oil is characterized by the gradual effect of rainfall on production in the six months after its drought. We see that Malaysian production has dropped by 19% in November compared with the same period last year, but it is often the off-season after November, but the average decline should be about 10%, and we are now down by 19%. In Indonesia, we will gradually see the impact of drought on it after the first quarter. Judging from the current market estimates, the output of the two countries may be reduced by more than 3 million tons this year, and the average annual production of palm oil has increased by about 5 million tons in the past five years.

At the same time, Indonesia has adopted a new bioenergy policy, imposing a tariff of about $50 on crude palm oil exports and $30 on net palm oil, which is used to subsidize a loss in bioenergy production. The National Energy Corporation probably plans to launch a mandatory tender to increase bioenergy consumption from September. We expect to increase by about 1.7 million tons for the whole year.

At present, the focus of oil hype is the impact of the bioenergy policy of the United States on soybean oil, and the second most important thing is whether the reduction in production in Malaysia and Indonesia after the first quarter is a process of confirmation or falsification. But in any case, I personally think that the worst of the oil is over and can be allocated to the bulls, but in any case, the oil as a whole is still a bear market, and the cycle can only be done as a rebound, not as a reversal or the beginning of a bull market. the operational characteristics of these two definitions are completely different.

Corn

Corn, which peaked in August 2012 and peaked at 820 cents, has fallen to 330 cents, and corn has fallen all the way, entering a bear market two years ahead of soybeans. Corn, like soybeans, has had a bumper harvest for five consecutive years, with a continuous accumulation of global output of 1 billion tons. Inventories are also rising in the global phase, because while production is rising, there is little bright spot in global consumption. Feed consumption is mediocre, with China's feed consumption increasing by 1000 tons this year. Industrial consumption is mainly 360 million tons of corn produced in the United States, half of which is used to produce alcohol, but the use of alcohol has reached the ceiling set by the government, which means that the demand for corn for bioenergy has also entered a bottleneck period, and there can be no more bright spots. In this case, the global corn inventory, and the stock of corn is also rising, so the price of corn has been falling. The core of global corn is the United States. American corn production and US corn exports, including US corn consumption, play a vital role in global corn prices. However, because of the continuous appreciation of the US dollar, American corn has been badly squeezed by Brazil and the European Union in the export market this year, so the pressure on the United States is very great.

Judging from the current expectations for next year, first, we think that, according to the current ratio of soybean to corn, the area of corn in the United States is likely to increase next year, while corn in Argentina is also increasing, that is to say, we still do not see a reduction in the area of the main supplier of corn, so corn is still in a bear market and has a long way to go. American corn has lost money for three years in a row, and the loss is relatively small. American farmers earn a lot of money, so they may still grow corn.

The situation of wheat is very similar to that of corn, that is, there is a continuous bumper harvest, consumption is very mediocre, the stock of wheat is increasing, and no country has reduced its area, so it is still bearish. The current price is 480 cents, and there is the possibility of breaking 400 cents. Bear market. Generally speaking, China's wheat supply is relatively tight, because our wheat area has not increased, our stocks have not increased slightly, and we import about 3 million tons a year to maintain domestic balance.

We may want to focus on China's corn. In fact, one of the most important factors in the global bear market of agricultural products in recent years is China's market-supporting purchase policy, of which the largest variety is corn. In other words, the price of corn in China has had a huge impact on the global price of agricultural products. Why would you say that? We know that China now imports 80 million tons of soybeans and 45 million tons of cereal feed every year, but we produce so much corn that we can't use it all by ourselves, and we pile it up in the store. at the same time, we import a lot of foreign grain, forming a very wrong state, which is the result of China's policy of supporting the market.

Last year, China's corn output was about 230 million tons. On the whole, the annual surplus supply exceeded demand, producing an extra 50 million tons of corn. This is the current situation of corn. But what is the state of China's corn stocks? We can tell you that China began to buy corn in the market in 2008: 35 million tons in 2008, 610000 tons in 2009, 8 million tons in 10 years, 1.02 million tons in 11 years, 30.83 million tons in 12 years, 69 million tons in 13 years, and 84 million tons in 14 years. Although the price has been reduced to 200 yuan this year, according to the current progress, the government may receive 80 million tons of corn after the end of April 30 next year, that is to say, apart from throwing. How much corn will there be in the warehouse? Before the national reserve of 15 million tons of corn, we collected 30 million tons in 2012 and threw it to 10 million tons, which is 25 million tons. In 2013, we received 69 million tons and dumped 8 million tons, leaving a balance of 60 million tons, which adds up to 95 million tons. In 2014, it collected 83 million tons, which adds up to about 177 million tons. We will harvest 50 million tons of the most conservative this year, and our stage stock will also reach 230 million tons, that is to say, if China does not grow corn for a year, we can now. Moreover, the corn we first harvested in 2012 and 2013 can no longer be released now, that is to say, the loss of single corn collection and storage, storage fees, bank interest plus the loss of price difference is basically calculated to be about 300 billion. If you add up the sugar, cotton, oil and corn collected in the past few years, the central finance estimates that these items will lose 700 billion in the past three years.

How to solve this problem? I think the government will certainly make up its mind to change this policy of supporting the market next year, and now it is asking for the separation of price and compensation, that is to say, to return the price to the market, the first is to protect the income of farmers from growing grain, and the second is to ensure that someone will buy their grain after they have sold out. What are the measures to be taken? For example, if a farmer grows an acre of corn, I will give you 200 yuan. When the price of corn falls to the cost line, the government begins to collect it. We calculated that the two main corn producing areas in China, one is Huang Huaihai, which is about 50 million tons a year, and the most important is the three eastern provinces and Inner Mongolia, with an annual output of 70 million tons. Now statistics show that the price of corn in Jilin Province is 1500, that in Liaoning is 1500, and that in Heilongjiang and Inner Mongolia is basically 1150. Then it is conceivable that if the government compensates by 200 yuan per mu, the price of corn in Jilin and Liaoning will fall to the level of 1300 or 1400. At present, the trading price of corn in Dalian futures market is 1900 in May, 1800 in September, and about 2050 in Dalian Port, that is to say, huge corn stocks. The core task of corn in China is that the first is to get rid of output, and the second is to get rid of inventory. Personally, I think it will take a very long time to get rid of output and inventory, that is to say, China's corn is a slow bear market, and if China's corn prices fall, it will have a more serious impact on the pricing of global agricultural products. We can say that Chinese corn can be an anchor for the price of beans and cereals. It is because a lot of land in China has gone to grow corn that China imports other grain and oil varieties into the world. Now the government is determined to adjust this structure, so we think that the reduction of corn prices in China will have a very big impact on the reduction of global agricultural prices.

But the current state of the corn trade is troublesome because every contract is discounted and the September contract has fallen to a very low level. So in terms of trading, corn is very difficult to trade, but I think there is one variety that can be sold off continuously at high prices, that is, starch. Starch with the decline in the price of corn, I think the price of starch is falling continuously. Moreover, China will strictly restrict the import of cassava from this year, which has a great impact on cassava in Southeast Asia and a great crackdown on cassava starch.

Sugar

Finally, I would like to tell you that sugar, like oil, there is a gap between supply and demand in the first year of this year. From an annual point of view, there is a shortfall of about 4.5 million tons this year, which is the first such situation in the past four years. Why is there such a big gap between supply and demand? The most important thing is Brazil. The first is continuous rainfall during sugarcane crushing in Brazil, resulting in a nearly 3% drop in sugar output from sugarcane compared with last year. Second, Brazil also uses sugarcane as fuel ethanol. Because the price of sugar continues to fall, the price of fuel ethanol, that is, alcohol, has also dropped a lot. compared with when it is below 0.7, the overall consumption of alcohol has increased significantly, by about 30% to 40%. About 60% of sugar cane is used to produce alcohol. As a result, sugar production has fallen, originally expected to be 32 million tons, but is now estimated to be about 29.5 million tons.

The second is Indian production. India, which produced 28.3 million tons last year, is now expected to vary from agency to agency, with an estimated overall reduction of 2 million tons. The two countries are major sugar producers. So we think the low point of sugar may also be seen. Sugar has fallen since August this year, from 13 cents to 10 cents. In the end, the 20% decline is mainly caused by the devaluation of the real. As the real has stabilized and rebounded, sugar has also seen a low. Since August 28, international sugar has rebounded by 50% and has recently retreated. However, we think that the absolute low of sugar has been seen, and I personally think it is still a buying opportunity for this withdrawal.

The same situation has happened in Brazil and India for sugar in China. China's sugar output this year is the most pessimistic forecast. let's look at the balance sheet. last year, our sugar output was 10.58 million tons, and our sugar production has been declining for three consecutive years, and it is estimated to be 9.3 million tons this year. From the current situation of extraction, Guangxi and Yunnan entered the extraction period in November, and the sugar yield is very poor. At present, the most pessimistic forecast for sugar production in the market is about 9 million tons, which is the supply situation. Second, because of our annual consumption, last year we gave 15.3 million tons, and this year we gave 15.2 million tons, why did we reduce 100000 tons? Mainly because the price of corn starch has fallen, we began to use corn starch to produce starch sugar. So now we see that Pepsi and Coca-Cola have changed from sugar cane sugar to glucose syrup, that is, sugar made from corn starch instead of white sugar. This reduces the demand for white sugar. Our output is 9.3 million tons and our consumption is 15.2 million tons. We are now importing in two ways. one is to import within the quota, which is about 2.1 million tons, and the extra quota is also controlled. This year, the extra quota target is 1.9 million tons, so if we add imports and our own domestic products for the whole year, we still have a shortfall of 2 million tons this year, which may be thrown out by the state. There are 7.7 million tons in the government reserves, and the government will eventually throw it out to solve this breach. The relationship between supply and demand of sugar in China can be defined as a state of only equilibrium, which is basically difficult to fall below the cost, or the cost should not exceed 10% for a long time. Therefore, we think that the bottom price of Chinese sugar is basically around 5200, that is to say, there is support below. According to the current purchase price of sugar cane, the common cost of sugar is about 5300 yuan. But there is also the problem of smuggling. The amount of smuggled sugar in Yunnan ranges from 4700 to 4800, which may be the limit we see below. Generally speaking, we think that authentic domestic sugar entering a seasonal low point is a very good opportunity to buy, but because it is now entering the stage of extraction and supply, and because the price of aged sugar or imported sugar is relatively low, there will be a drag. We think it is unlikely to rise sharply in the short term, but after May, the domestic sugar supply will gradually be tight, with the digestion of inventory. With the coming of the peak consumption season, we think that sugar may have a better rise. In particular, the main contracts fell below 5400 in May and September, and we think the margin of safety is very high. So we suggest that sugar and oil are our relatively preferred varieties.