Deutsche Bank warned of "substantial" threat to agricultural
commodity prices from a potential change to China's farm support policy, which
could reduce the stockpiling which has supported world prices of many crops.
China is reconsidering its agricultural support programme which
offers minimum state procurement values for the likes of corn, pork and wheat,
but which has, thanks to disconnects with international values, provoked market
dislocations and unintended knock-on effects.
In cotton, for instance, China has built up stockpiles equivalent
to about one-and-a-half year's use as farmers exploit generous state prices, which
have in turn left domestic mills paying over-the-odds for cotton, and turning
abroad for cheaper supplies when they can.
"It appears that appears China's agricultural stockpiling
policy may be poised to change," Deutsche Bank said, flagging reports that the
country may switch from price setting to alternative agriculture support mechanisms
such as insurance incentives or direct payments to farmers.
'Adds to the bear
The bank said that the "implications for a shift in China's
policy to price determination by the market are substantial, notwithstanding
the country's desire for the change to be gradual owing to concern over food
A switch to direct support to farmers, for instance, would,
in allowing domestic prices to fall closer to international ones, ensure "less
of an incentive for imports".
China is the top importer of agricultural commodities including
cotton, rubber and soybeans, and a growing buyer of corn and, this season,
When world stocks of many crops, such as corn and soybeans, are
rebuilding and so putting pressure on prices, "this adds to the bear case in
the agriculture market", Deutsche said.
"The possibility that the Chinese government will move away
from stockpiling and towards direct farm subsidies will discourage agricultural
imports, in our view.
raises the possibility that agricultural prices have further downside heading
into next year."
The premium of Chinese cotton prices over international ones
is famously high in cotton at the equivalent of about 150 cents a pound, more
than 80% above New York futures, the world benchmark.
However, for corn too, the support price, of more than $9 a
bushel for this year's harvest, is more than twice that of Chicago futures, with
wheat's differential not far behind and the support price for sugar also generous
by international standards.
Support prices in oilseeds are closer to international
values, Deutsche said, implying that these markets appear less at risk from a
change in policy.
The chances of Chinese reforms to agricultural support increased
last month when Fang Yan, head of the rural department of the National
Development and Reform Commission, said that "grain prices have come to the
stage to be decided by the market", according to the China Economic Times.
However, any change would be gradual, and likely to be
trialled on one crop, she said, while failing to specify which one.
Meanwhile, Deutsche Bank last week revealed it was hacking
back its commodities business, cutting about 200 jobs, thanks to lower profits
in the sector, and the regulatory and capital costs of maintaining a business
which can have a large balance sheet impact.
The group is also moderately downbeat sentiment on price prospects
for many commodities, even after a year when they look set "to be the worst
performing asset class on an excess returns basis".
"This might imply a more constructive outlook for returns
heading into next year. However, ongoing hazards across the major commodity
sectors remain," the bank said in a report last week.