The U.S.-China trade war has the potential to reshape trade flows globally

Pedro H. Dejneka, MD Commodities: “I do not believe the current geopolitical developments put “global food security” at risk. What it does is reshape the flows of global food trade. Take for instance how the U.S. – Russia wheat embargo of the 80’s and how it helped reshape Russia’s role in world wheat trade. The U.S.-China trade war has a similar potential to reshape trade flows globally for years to come, but with the vast availability of land and new production technologies, it shall not risk global food security. To the contrary, it may incentivize the growth of production in countries outside of the U.S. and the search for greater food production efficiency in the United States, which could potentially and eventually lower food prices globally.”

Interview: Namık Kemal Parlak
Pedro H. Dejneka, a well-known commodity markets consultant focused on Latin America, gave an exclusive interview to Miller Magazine on the dynamics of the international grain trade. He answered our questions regarding to the different aspects that influencing the agricultural commodity market and shared his insights on the future of the global grain market. Mr. Dejneka is a Partner and Co-Founder of MD Commodities, a global macroeconomic and agricultural commodity consulting firm with offices in Brazil and in the United States. He is one of the top international presenters on the subject. I had privileged to listened to him at the 16th International Conference ‘Black Sea Grain-2019’ by UkrAgroConsult. He has an impressive communication skill and a deep knowledge of agricultural commodities and macroeconomy which makes him a sought-after speaker at the international events.

What are the most important factors affecting global grain trade?
Certainly, the current geopolitical environment is wreaking havoc and bringing much uncertainty to global grain trade. That, accompanied by the very fragile state of multiple major economies around the globe exacerbated by the unprecedented amount of debt all contribute to one of the most uncertain and volatile times in the history of the global grain trade.

What kinds of changes you have been experienced in global grain trade recently? Could you share your observations briefly?
In recent years we have seen a major change in the somewhat opaque business model that once dominated grain and commodity trade around the world. The advent of technology and availability of public information, particularly in the most recent 10-15 years, has diminished the “information walls” that once separated the large players from the rest. This resulted in more transparency and the need for much better efficiency in search of sustainable margins.

How U.S. trade disputes with China will develop? Can you share your opinion with us?
This is literally and truly an “opinion” – as I do not believe anyone, not even those directly involved have the answer. We are seeing a “battle of wills” by leaderships in both China and the U.S., with China holding their ground potentially betting on a loss by Trump in the 2020 Elections, while the U.S. side has gathered more than enough political and citizen support to not only hold strong but also adopt more aggressive initiatives. Relatively speaking, the U.S.’s economy is in much better shape to withstand a prolonged trade war, despite risking permanently losing market share in world agricultural trade. On the other hand, it is clear that both countries, and the global economy, would benefit from at least a prolonged trade truce if not an all-out deal. Unfortunately, it seems as though heels have been dug deep in the sand on both sides and at this time a deal within the next 12-18 months is seen as much more of an outlier than an expected outcome.

Stable grain trade is crucial for global food security. However, the trade war between the US and China showed that this trade is quite open to threats and at risk. What can be done for protecting the grain trade from such risks?
Given how geographically diversified major grain production has become in the recent decade (think South America and the Black Sea growth in production and exports of major grains and oilseeds), I believe world grain trade is much more prepared today to withstand the side-effects of certain geopolitical risks than it has been in the past. I do not believe the current geopolitical developments put “global food security” at risk. What it does is reshape the flows of global food trade. Take for instance how the U.S. – Russia wheat embargo of the 80’s and how it helped reshape Russia’s role in world wheat trade. The U.S.-China Trade War has a similar potential to reshape trade flows globally for years to come, but with the vast availability of land and new production technologies, it shall not risk global food security. To the contrary, it may incentivize the growth of production in countries outside of the U.S. and the search for greater food production efficiency in the United States, which could potentially and eventually lower food prices globally.

One of the major risks for the grain market is protectionism. Do you think the trade war would lead to a rise in global protectionism?
It is human nature to push good things past the point of optimal return, let’s call it the “greed factor”. Amongst other factors, the push for a world with no economic/political/social borders surpassed the point of optimal return and caused a reverse effect worldwide: protectionism. There is a point of equilibrium somewhere in the middle between free-trade and protectionism. We are far from it right now, as the pendulum has swung back towards the protectionism side. I hope and believe it will eventually swing back towards a healthy middle between free trade and some small yet necessary dose of protectionism. The trade war, in my opinion, is actually bringing mixed results: more protectionism in some countries which in turn are igniting freer trade in other regions. An interesting paradox indeed…

Brazil has huge potential to expand its arable land for agriculture and to feed the boosting world population. Do you think Brazil could become the world’s grain-export powerhouse?
It already is a powerhouse with a lot of room for growth as it continues to improve internal logistics to match the potential for production growth due to land availability, climate, technology and expertise.

Brazil has increased its grain production but it has logistics, transportation and port capacity problems to supply the world markets. If it aims to increase grain export, Brazil should solve these problems. Do you think Brazil can manage to settle the infrastructure difficulties?
Brazil has managed to become a top 3 exporter of major food and industrial commodities (soybeans, corn, cotton, coffee, sugar, beef, iron ore, etc…) despite its logistics and infrastructure challenges. I often point out during my international speeches that “Brazil is the country where things work even when they are not supposed to work”, meaning: Brazilians often manage to do a lot with a little. Despite still having some major logistics issues, there have also been major improvements. In the years to come, logistics and infrastructure developments shall become much more of an added driver than an obstacle to Brazil’s exports.

Today, insects can be used as an alternative source of protein. There are many projects ongoing in that field all around the world. Taking the rapidly rising world population into consideration, can insects replace the grains? If the consumption of insects as protein increases, how does it affect grain trade?
Maybe I am being somewhat shortsighted, but I do not believe such “alternative proteins” will or need to take over as the main source of protein worldwide. Like most things in life, it is advantageous to have options at our disposal, but I do not buy the argument that we shall see a complete overhaul of protein intake habits in the next few years and decades. Sure, we may continue to see an increase in alternative protein sources, but I do not believe it will happen at a level that causes major disruptions to global grain trade.

Talk of alternative proteins taking over demand for traditional protein sources worldwide seems overdone, the same way that I believe the thesis that the world will have major food security issues due to increasing population in the next few decades is overdone. According to many in the 1960’s and 70’s, we were supposed to run out of food by the turn of the millennium. Not only did that not happen, the world today is a much more efficient producer of foods. The main issue we face is not running out of food but ensuring that the food we produce does not go to waste and reaches those that need it most. We need to invest much more time, energy and resources searching for more efficient ways to ensure the food we produce gets everywhere it needs to with much less waste. We do not have a food production problem; we have a food distribution and accessibility problem.

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