Commodity trading and Supply/Demand risk

August 27, 2024 Uncategorized

Internationa Trade and Market Risk

International trade is defined by a web of interlinking flow of money and materials. For example, Australia sells iron and coal to China, America buys the products that China manufactures, money flows back to China from the purchases, this pays the workers who make the goods, the workers then buy wine and beef produced in Australia, the production of the wine and beef uses inputs that is manufactures in India, and so the web grows. So why should we have an interest in this topic, well from an agribusiness perspective what happens overseas will drive the supply and demand for Queensland and Australian agricultural commodities. Recognizing the link between countries in trade is critical to the decisions Australian farmers make now and into the future. Supply and demand drives commodity prices and therefore the viability of farming businesses. Therefore, from a financial lenders’ perspective, sustainable prices reduce financial risk and thus lender risk. That is why we should understand the interlinking flow of trade between countries.

Table 1 identifies the total Queensland farm exports to three countries China, USA and India, recognizing the significant growth in exports to China. The question we need to ask, is this a risk?

Table 1 Qld Farm Exports

 Food
China
($million)		Food
USA
($million)		Food
India
($million)
2012–13$419.23$643.52$263.66
2013–14$772.54$860.64$98.46
2014–15$786.62$1,762.45$118.02
2015–16$818.25$1,392.96$489.69
2016–17$724.61$840.18$937.91
2017–18$893.73$929.66$435.94
2018–19$1,205.12$1,081.58$13.53
2019–20$1,832.72$1,244.47$11.29
2020–21$1,120.39$949.43$11.15
2021–22$1,565.48$1,119.66$5.56
2022–23$2,403.75$1,241.09$3.10

Chinese market has grown significantly since 2018-19. However, there is a catch; the Chinese economy is declining from the highs of the early 2010’s by 35.65% or -2.77% in real economic growth since 2012-13. Interestingly the Chinese economy is in lock step with USA (Chart 1 where USA economy has also declined by 37.25%).

Chart 1 (USA and China GDB)

Worryingly for Australian farm exports, there is a link between premium food products and consumption such as wine and economic performance “There’s no doubt that consumption of both domestic and imported wines in China is a lot less than it was if you went back six years ago, it is a third of the size that it was and I don’t think those conditions have changed yet (Peter Bailey, the manager of market insights for Wine Australia). This has implications for a range of Queensland farm commodities if Chine continues to have economic growth constraints as consumption for discretionary spending declines Chart 1.  This is exacerbated by the growth in imports from countries with cheaper production costs such as South America.

What can Queensland producers do to mitigate the possibility of losing market share, and price reductions.

  • Know the cost of production and strive to improve productivity (international competitiveness)
  • Diversify markets
  • Assess risk through sensitivity analysis (financial scenario analysis)
  • Be aware – understand the market (supply and demand drivers)

This strategy will not stop the effect on farm revenue if there is a reduction in Chinese exports. However, it will assist in planning for potential impact.

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