The Chinese government is considering buying up to 7 million tons of U.S. wheat, Bloomberg reported Tuesday afternoon. The proposal has been floated as a means to help reduce the China - U.S. trade deficit and make progress toward a resolution in the countries' ongoing trade dispute. China has not purchased American wheat to replenish state reserves in many years, and a deal of this size would have significant implications for commodity prices and transportation activity in the United States.
For context, U.S. farmers produced about 51 million tons of wheat last year, about half of which is exported. China's purchase could potentially account for 28 percent of annual American wheat exports. Purchases of soybeans and corn, halted since June 2018 on the back of retaliatory tariffs, were also reportedly on the table.
Since January 15, generic wheat futures have risen 2.5 percent to $5.24/bushel, boosted in part by Russian talk of reducing exports to focus on building domestic supply. In the same period, soybean futures were up 2.2 percent to $9.1275/bushel.
The general consensus is that Chicago commodities traders are waiting for firm volume commitments and timetables before pricing in new Chinese demand.
"There is nothing concrete on Chinese buying, and in that environment of uncertainty it is hard to see an increase in U.S. bean prices," Phin Ziebell, agribusiness economist at National Australia Bank, told Hellenic Shipping News.
Traders may also be waiting for more data before reacting; U.S. Department of Agriculture data on grain and soybean stockpiles was scheduled to be published last Friday, but the partial federal government shutdown caused the release to be canceled.
"You delay all these reports and the market has no idea where to go, other than trade guesses," Dan Henebry, a corn and soybean farmer, told Iowa's The Gazette.
Wheat and associated grains are a bulk commodity carried primarily by rail in North America. As a percentage of its total carloads, Canadian Pacific Railway Limited (NYSE: CP) hauls the most grain at 9.2 percent of all carloads; Kansas City Southern's (NYSE: KSU) grain volumes represent 6.8 percent of total carloads; BNSF's grain volumes fill 6 percent of its total carloads. Of those three railroads (the other Class 1s all haul 4 percent or less of grain), only BNSF managed to grow its grain volumes in 2018, by 10.3 percent year-over-year. Both Canadian Pacific and Kansas City Southern posted declines in grain volumes for 2018 of 1.5 and 1.6 percent, respectively.
The post-harvest September - October peak in rail traffic generated by grain has lost momentum since 2016 for both the United States (RTOGR.USA) and Canada (RTOGR.CAN):
(Chart: FreightWaves SONAR)
In 2016, grain carloads peaked at about 28,500 for the week of October 30; a year later that number was 23,300; in 2018 that week's volumes dropped to 20,200.
While current information on U.S. grain stockpiles is not available, during 2018 the global trend was downward due to hot, dry weather in many regions of the world that damaged wheat yields. In August 2018, Reuters reported that "global wheat supply to crisis levels."
Assuming fairly low levels of U.S. wheat stockpiles, the resumption of a healthy China - U.S. agricultural trade will be positive for grain volumes, commodity prices and demand for rail capacity.
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