Commodities Eye 2020 China Growth Prospects

  • 15 Jan 2020
  • By Erik Norland

Prices of corn, soy and wheat are continuing to move closely in line with the currencies of key exporting nations.  Corn and wheat prices are sensitive to movements in the Russian ruble (RUB) (Figures 1 and 2) while soybean, meal and oil prices track the Brazilian real (BRL) (Figures 3, 4 and 5).  Wheat also moves with the currencies of smaller but noted exporters such as Australia (AUD) and Canada (CAD) (Figure 6 and 7).  Soy also closely follows CAD (Figure 8).

AUD, BRL, CAD and RUB, in turn, tend to move in tandem with commodity indices weighted to reflect their respective exports (Figures 9-12).  Energy and metals dominate commodity exports from most of these nations. They make up slightly more than half of Brazil’s commodity exports, over 80% of Canada’s exports and more than 90% of Australia and Russia’s commodity exports.

The prices of industrial metals and energy show an extremely high, but often lagged, sensitivity to the pace of growth in China, the world’s second largest economy that has a voracious appetite for commodities. They seem to be especially attuned to a narrowly focused index of China’s industrial growth called the Li Keqiang Index that focuses on bank loans, electricity production and rail freight volumes (Figure 13).

As such, the path of influence appears to be as follows: accelerations/decelerations in the pace of China’s growth tend to raise/lower the prices of energy and metals. Rising/falling prices for energy and metals often cause the value of AUD, BRL, CAD and RUB to rise/fall versus the US dollar.  Since agricultural production costs are at least partly denominated in local currencies, the prices of corn, soy and wheat tend to move in the same direction of the currencies of the exporting nations. 

Figure 1: The Black Sea region is quickly becoming the third largest source of corn exports.

Figure 2: The Black Sea region exports over twice as much wheat as the US.

Figure 3: Brazil now rivals the US as the largest exporter of soybeans.

Figure 4: Since 2012, soybean meal has closely followed movements in the Brazilian real.

Figure 5: Soy oil closely followed the real for years before diverging in late 2019.

Figure 6: Wheat prices also follow the currencies of smaller exporters such as Canada.

Figure 7: Wheat prices also track the Australian dollar.

Figure 8: Soybeans have tracked CADUSD especially closely in the past few years.

Figure 9: AUD often follows a basket of key commodity exports including iron ore and coal.

Figure 10: The real closely tracks an index of Brazil’s exports, many of which head to China.

Figure 11: With rare exceptions, CAD tracks movements in the prices of Canada’s commodity exports.

Figure 12: Ruble closely tracks the price of energy, which dominates Russia’s commodity exports.

Figure 13: Li Keqiang Index and Official Chinese GDP as indicators of growth.

What may be useful to commodity and currency investors, however, is that commodities and commodity currencies often show a lagged response to economic developments in China. Sometimes they don’t respond to economic accelerations or decelerations for as much as one year.  For example, if China begins to grow more quickly today, it may take some time before domestic inventories of key commodities begin to dwindle. By contrast, if China slows, they may not reduce buying of commodities immediately, giving time for inventories to build.  In some cases, the price response in commodity markets to changes in the pace of Chinese growth may not show up for six months to a year, or more. 

Looking ahead to the 2020s, growers of corn, soy and wheat might want to focus on Chinese growth as a leading indicator of future changes in both ag exporting currencies such as AUD, BRL, CAD and RUB but also agricultural goods prices themselves.

Given China’s outsized importance in terms of demand for metals and energy and the knock-on effects for exchange rates and agriculture prices, the question of how China’s economy performs in 2020 is key. China’s official growth rates slowed to 6% in late 2019, its lowest in decades. The Li Keqiang measure also shows slowing in recent years to around 7.5% (from a pace of as high as 11.5% in 2017 – Figure 14). Other measures also indicate that China’s growth has slowed somewhat: retails sales grew at 9% in 2018 but “only” 8% in 2019. China’s exports have stagnated as percentage of GDP. Moreover, there is anecdotal evidence of credit stress brewing among Chinese corporate borrowers and even some local governments are faced with extremely high levels of debt.

Figure 14: China’s pace of growth has slowed but remains solid.

Despite these signs of slowing and stress, there is plenty of reason for optimism. To begin with, the People’s Bank of China has been slashing its reserve requirement ratio, which, if it has its desired effect, should stimulate borrowing (Figure 15).  Moreover, the US-China trade dispute appears to have at least levelled off and may be heading towards at least a partial solution.  This has the potential to boost confidence and investment.  A de-escalation of the trade war, combined with easier monetary policy, has steepened China’s yield curve. The slope of China’s yield curve has been strongly correlated to subsequent accelerations/decelerations in Chinese growth during the past 15 years.  If a steeper Chinese yield curve is indeed pointing to a rebound in growth, that could come as welcome relief to sellers of crude oil, coal, industrials metals and agricultural goods, who have suffered through five years of low prices and sideways markets.

Figure 15: The PBoC continues to ease monetary policy.

Bottom Line

  • Agricultural commodities closely track currencies of agriculture exporters
  • Commodity exporting currencies move with energy and metals prices
  • Energy and metals prices respond to changes in China’s growth rate
  • China’s growth has been slowing in recent years
  • Monetary easing and a thaw in the trade war might improve China’s growth


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

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