Strict lockdowns in China – as the country tries to eradicate the spread of COVID – are not only affecting its citizens, but also having flow-on impacts on trading partners, like Australia.
How are China lockdowns hurting the Aussie economy?
There are four impacts of the lockdowns that are set to have ramifications for agribusiness – disruptions to freight logistics, Chinese corn plantings, dairy demand and hog pricing.
The already-stressed global container logistics situation is becoming more complex due to delays around the Shanghai port. The dry container index, which tracks average prices paid for the transport of dry bulk materials across more than 20 international routes, increased five-fold through 2021 as a result of COVID lockdowns in different parts of the world.
While the index is down 16% since early March and 25% down from the September 2021 highs, it looks likely that the lockdowns in China will add to container logistics issues and keep freight well above historic levels for 2022 and also likely to remain elevated well into 2023.
Disruptions to corn plantings in China – the world’s second-largest corn producer and also the world’s primary corn importer – are raising more concerns in an extremely-tight global grains markets. Chinese corn planting faces delays in two key provinces as some farmers are stuck in major cities and are unable to access their fields due to the COVID lockdowns.
Lockdowns have created delays in planting this feed crop in some parts of Jilin and Liaoning provinces, and these two provinces account combined for 20% of China’s corn acreage. The delay in planting increases the risk of frost damage later, but at this point it is too early to say what the impact will be on yields. It will depend on the weather through the season.
Although the delays in planting Chinese corn –and China’s feed grain import needs more generally, they are not the biggest driver of current global grain prices. Rather, world Chicago Board of Trade (CBOT) corn prices had hit a 10-year high in April this year and remain above USD 8/bu, driven by concerns about the early arrival of the dry season in Brazil and below-normal rainfall forecast for the next three months which could reduce Brazilian corn yields.
In addition, cool and wet conditions for corn planting in the United States and an expected reduction of well over 50% in Ukrainian corn production (as well as export uncertainty from Ukraine) in 2022 were also putting upward pressure on global grain prices.
Omicron variant and China’s “dynamic zero-Covid” policy are also bringing headwinds to consumption in the food service sector. And this was playing out in reduced dairy demand.
Dairy demand in food service is slowing in China while, according to our calculations, dairy products in China produced from imported Oceania whole milk powder (WMP) are more expensive than those from locally-produced dairy for the first time in eight years.
After a record-breaking 2021 in milk powder imports by China, the demand uncertainty from restrictions is likely to dampen the ‘dragon’s’ import appetite going forward. Oceania’s record dairy prices may also make it more difficult for ANZ exports to be competitive into China.
Hog pricing collapse
China’s COVID restrictions had resulted in a big drop in food service sales of meat products, as well as supply chain disruptions, which had impacted hog production and prices. Chinese hog producers have liquidated herds to avoid further losses, imposing further downward pressure on Chinese pork prices which can also impact China’s feed grain import needs.
Stefan Vogel is the general manager for Australia and New Zealand at RaboResearch.