by John Buckley

 

Crop shortfalls combined with moderate consumption growth to boost raw material costs for the grain and feed sector in 2020. For many commodities, prices exceeded levels most observers could have expected at the start of the year, especially wheat which, on paper at least, was in another year of record surplus.

That traditional unpredictable, weather, played its part, turning out smaller than expected maize and soya crops in the USA, soya in Argentina and wheat in Europe and Ukraine. But it also gave some compensation - larger than average (for the second year running) Latin American maize and (Brazil at least) soya crops alongside bigger Russian, Canadian and, more recently, Australian wheat output.

On the demand side, covid-19 did no harm to wheat or soya consumption. Consumers needed bread and storable cereal products more than ever while livestock herds, expanding in a number of countries, still had to be fed. However, the pandemic's drastic curbs on transport did have a big impact on corn, over 40% of which (usually well over 120m tonnes) normally goes to ethanol fuel in the key producer/consumer country, the USA (which has so far shed about 18m of that). But even then, the world still consumed more corn than it produced for a fifth year running, eroding stocks to multi-year lows and, amid a second disappointing US crop in a row, helped fuel a jump in prices to their firmest since mid-2019.

Despite that the late summer/autumn headlines were still grabbed by wheat and soya, prices of which recently reached their highest since 2016 and 2014 respectively.

Wheat's strength, amid large 'surplus' stocks can be partly explained by half of these being held in China - 'off-market' and assumed of lower than market quality – for food use at least. Even accounting for that, supplies were hardly tight – why prices have recently receded from their autumn peaks – if leaving the impression that this market might have been undervalued in recent years.

While the US soya crop fell short of target, this commodity's phenomenal rise in value – from a four-year low in April to a six-year high in November - was more a reflection of demand. Top of the list was the 'phase 1' trade accord signed at the turn of the year between the US and China allowed the former to reclaim exports lost during the early Trump years of trade confrontation with the number one soya customer.

As a result, US soybean stocks, earlier expected to finish this season over 11m tones, are now expected to drop well below 5m – a wafer thin security cushion against any weather problems in Latin America over coming months or in the US itself from spring onward. Just two seasons back, the US had been worried about a potential 30 million tonnes surplus causing a soya price crash! With rapeseed and sunflower seed crops also underperforming, soya, as the dominant meal source has lent strength to prices across the protein sector.

Is the worst over?

Factors developing at the close of 2020 suggest prices may stay relatively firm into 2021 or are, at least, unlikely to retreat fully.

On the supply side, wheat is pricing in weather risk to the coming year's winter wheat crops in Russia and the US – the two largest exporters. Some Russian analysts think 20 percent of their crop has already been lost to drought at planting time.

The US also has drought over a large area as we go to press and continues to sow smaller than normal acreages. Ukraine's current outlook is not much better. On the plus side are this season's large Australian and Canadian crops, harvested later than in Europe, the FSU and the US, so still to fully work through the market.

While it produced more than expected in 2020, Russia may soon curb export sales or slap a levy on them, if 2021 output looks like falling very short of target as the government struggles already with food price inflation. Yet the US has a good supply including a still large carryover stock. If the dollar continues to weaken as some expect* it could help fill any Russian gaps in first half 2021. In fact, US export sales are already up by 13% on the year against an USDA prediction of a mere two percent gain.

However, more spring wheat – especially higher quality hard wheat, will need to be sown in the US, Canada and Russia to compensate for the winter crop shortcomings. Europe meanwhile expects a bigger winter wheat crop in 2021 on larger planted acreage, assuming weather improves after an unlucky 2020 with too much and too little rain at times.

Overall, wheat supply should be adequate but perhaps less flush than in the past year but consumption and import demand could increase if China continues to suck in larger quantities (for food and feed). Among other major producers, India should be watched as potential export source, producing record large crops and sitting on its biggest-ever stockpile.

Currently December 2021 CBOT soft wheat futures suggest prices not far from those seen recently while Paris milling wheat futures – assuming EU crop recovery, point to an 11 percent decline from current levels.

Maize

Maize is also taking support from weather risk, mainly in Latin America where the La Nina system threatens to renew and/or extend droughts already seen in both Brazil and Argentina. But if they do get the currently forecast crops, their supply should be adequate through first half 2021.

Attention then turns to US planting weather and acreage plans. Soya has recently offered better returns than maize and could grab the lion's share of any extra acres going. But the US needs to expand planting too, to avoid its stocks going even lower, especially if domestic feed and ethanol use re-inflates as forecast. Ethanol's outlook depends on how quickly a Covid vaccine can get life back to normal – economic activity and transport fuel consumption. One of the salutary charts of 2020 was the crude oil price - from almost US$69/barrel in January to just over US$19 in April and, despite recently heading back towards US$50, still down by over a quarter on the year.

Import demand for maize could stir the market, particularly China's, expected to double this season to at least 16.5 million – some say as much as 30 million tonnes after domestic crop shortfalls. Three or four years ago, it imported just 2.5 million tonnes. The US will be a key supplier and into the New Year, Latin America too.

Traders will also be watching crop performance in Ukraine, which could sow more – and the recent top corn importer, Europe (around 20m tones last year) where production is not seen growing much in 2021.

up these and other factors, forward futures suggest a fairly relaxed market that has factored in the smaller supply at prices no higher than a year hence than they are now.

Soybeans

soybean stocks are looking precariously tight at end 2020/21. A record large Brazilian crop – still possible - could help but the US is getting well sold, exposing the market to potential price strength in first quarter 2021 unless China cancels some US purchases and switches back to Brazil. Amid tight stocks and strong price signals, US farmers seem certain to sow a far bigger soya area in the coming spring but they'll need cooperative weather. The size of that crop may be the key factor determining soya meal prices through to 2022. Among other oilseeds, Canada might sow more spring rapeseed but the EU – while possibly on course for minor crop recovery in 2021 (+1 million tonnes?) if weather cooperates. Ukraine's dry winter sowing may also reduce this major exporter's contribution, raising the onus on Australian supplies. Spring-sown sunflowerseed crops need to increase in Russia, Ukraine and Europe. It should be emphasized that soya has carried most of the burden of rising global oilmeal consumption in recent years. So whatever happens with other oilseeds, meal costs across will be dominated by soybean crop fortunes.

Markets will also be keeping an eye on the speculative community's attitude towards food commodity markets as inflation talk smolders in the wake of various countries' vast Covid rescue spending sprees – a potentially big grey area for future price prediction.

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