The low down on the Japanese wheat import system

While the Japanese have been one of our largest and most valuable wheat customers for many years, it is probably fair to say that few of us really know how the system works. Up until the last week I had no idea really, but this week one of the newest members of our team Richard Smith – our Asian foreign correspondent based in Tokyo - Japan wrote a fascinating story in the ProFarmer newsletter on how the Japanese milling wheat import system works.

Now, I have to explain a few things about Richard Smith. He talks with a very strong Japanese accent and has very Japanese mannerisms, I have deep suspicions Richard Smith is his writing alias. Anyway, I call him ‘Smithy’ and we get along fine.

Anyway, here is a snapshot of how it works. Anyone interested in the market in more depth should contact the office and become a subscriber. Japan’s Ministry of Agriculture, Forestry and Fisheries (MAFF) controls both producer and resale prices of domestic and imported wheat. MAFF buys imported wheat at international prices and sells it to domestic flour millers at a markup.

In the new fiscal year 2007, MAFF started a new SBS system for food quality wheat and barley. The SBS system was set up to allow for greater flexibility of imports and transparency in a portion of food quality wheat.

There are two categories of SBS wheat imports. In Category I, MAFF purchases 240,000 to 250,000t of Australian Prime Hard amongst other wheat qualities from all around the world. The second category includes wheat varieties that are not imported under the state trading regime, to provide a vehicle for importing new varieties.

MAFF sold imported wheat at a higher price to domestic millers, while buying domestic wheat at a high price and selling it to domestic flour millers at a price lower than that of imported wheat. Revenues from transactions for imported wheat are used to help cover the cost difference between the purchase and resale of domestic wheat.

Next week I have asked ‘Smithy’ to explore how the market for noodle wheat works up there.

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Pools still need to prove themselves

Comparing pool returns with alternative marketing methods is like trying to herd cats. Some pools pay early commitment premiums with fixed washout costs, some pay quality increments and some don’t. In addition, costs are dynamic, payout rates differ and what do you compare them against.

ProFarmer has purposefully stayed away from this area because it is very costly to do a thorough, full and fair analysis and it is an area fraught with danger from a litigation point of view. The cynic in us suggests that pool managers don’t make it easy for us to compare returns, although to be fair many of the innovations have been used to differentiate products. Anyway we haven’t had enough time to properly assess the performance of individual pool managers in a deregulated environment – nothing before 2008/09 pools can be used as a measure because the environment prior to that was different.

Grain Trade Australia (GTA) established a committee to work on improving pool transparency about 4 years ago. I am not sure whether they actually meet but to say the pace of change has been glacial would be a gross overstatement. The only thing they have agreed on is to quote pools on an FOB basis net of management fees…Wow!

At the Pastoral and Graziers Association Conference (PGA) this year I outlined a number of areas where I would like to see Pool managers improve their performance and transparency:
• Better articulate their strategy
• Co-ordinate release of estimates
• Industry standards for the calculation of estimates/costs
• Make it easier to assess performance (statements on pool entry/exit, quarterly updates)
• State pool size
• Adopt an industry auditor (someone who understands how grain pools work and can spread best practice across the industry)

I heard this week that some 1mmt might have already been signed up to early commitment pools – a staggering figure when we don’t even know how 2008/09 pools have performed. Maybe this is too much, I was thinking about 300-400,000t. But if it is as large as 1mmt, I really wonder about the logic of this. The end pool return pays the premium and most of this will be based on the post harvest marketing period. With prices at seasonal lows what tricks will pool managers perform use to lift current returns to reasonable levels?

The past year has shown us that pool managers don’t have any magic formulas to outperform cash markets, nor do they hold long-term strong and significant relationships to extract huge premiums above current cash market returns – there are no free kicks in the grain marketing game. If they did the AWB pool should be outperforming all other pools by a country mile….they did have a big head start.

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A gloomy week for grains

It was another disappointing week for Australian grain growers with few glimmers of hope to point you toward.

On Friday the USDA increased its estimates for US and global stocks of the major grains courtesy of a prolonged and mild spring that has allowed crops to overcome early set backs. Although the USDA estimates came in below most analysts forecasts the trend of rising yields is definitely apparent and the market is already trading estimates well above the USDA September numbers.

Our friends at Ag Commodity Research out of Canada have also increased their estimates of the Canadian canola crop. They are now estimating a crop of 10.7mmt vs the latest StatCan guess of 9.4mmt. This shows the extent of the improvement in the northern hemisphere season.

On the positive side for canola, the Canadian crush is expected to increase some 1mmt this year and the Ukraine crop may also be some 1mmt lower than last year. A monster US crop would cast a large shadow over the oilseed complex, but with demand rising, current increased end stock projections are very much dependent on Sth America producing a record crop. If the US soybean crop escapes frost, attention will turn to crop prospects in Sth America.

Barley is sagging under the weight of a massive global corn crop, but global livestock industries and meat demand look close to bottoming out which should see demand for feed grains rise into our harvest, in contrast to last year when it was crumbling in the face of the Global Financial Crisis (GFC).

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Is the recovery real?

Since March, global equity and debt markets have recovered largely on the back of hopes that Chinese and developed economy fiscal stimulus measures would help pull the global economy out of recession. A pick-up in activity in China has also led to some recovery in growth across the entire region, but growth across much of the developed world still remains weak.

Despite enormous fiscal and monetary stimulus, in the US, the recovery there has only been a weak. Fresh data from the US Bureau of Labour Statistics (BLS) shows that the US unemployment rate rose to 9.7% in August – from 9.4% in July – its highest level since June 1983. The level of those under-employed – which includes those who have taken part-time work to make ends meet and those who had been searching for a job but have stopped looking – rose to 16.8%, the highest level since records began in 1994.

But while equity and debt markets are improving, the shipping market is crashing for the second time in a year, prompted by China’s reduction in raw-material imports and record numbers of new vessels setting sail. The rate for leasing capesize ships is expected to drop about 50% from the current price of $37,865 a day to as low as $18,000 before the end of the year. The Organization for Economic Cooperation and Development predicts a 16% drop in world trade for 2009. China’s State Council called for curbs on steel and cement production last week. Also pressuring shipping rates is the record 146 capesizes (equal to 28% of the fleet) that will be added to the fleet this year.

The key issue is that the Chinese economy is still heavily reliant on exports and unless export buying picks up, much of the increased production in China will be adding to inventories. Chinese authorities are endeavouring to implement measures to stimulate domestic demand, but re-transitioning the economy will take some time.

Curiously the $A is ignoring troubled waters ahead and has surged above 85USc, mainly on $US weakness, as it appears that Chinese purchasers of raw materials and commodity prices will be on the slide during the backend of 2009. Our bet is that the $A will be susceptible to another bout of global economic instability before the end of the year.

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