by John Buckley


Crop bounty sees raw material costs head 'South' again

It's not unusual for markets to turn choppy at this time of the year as traders and analysts start to put solid numbers on crops piling in from the main Northern Hemisphere grain and oilseed harvests – and 2019 has been no exception.

Choppier than usual might be fair comment this year after one of the wildest summers seen weather-wise, especially within the biggest producing country of all – the USA.

At this point in time, plenty of 'unknowns' persist on the supply front – mainly in the US itself, where major grain and oilseed crops have been sown and developed near or at their latest on record after an early-season washout.

But despite all the planting delays and some unhelpful cool weather since, the maize crop does seem to be within reach of the finishing line now amid a lessening risk of serious harvest weather damage.

If it reaches the USDA's last forecast of 350m tonnes it will only be about 16m or 4.3 percent below last year's crop and, with carry-in of over 62m tonnes (7.7m more than last year), could meet expected US domestic and export demand without eroding stocks to less than comfortable levels.

As noted in our last review, fears that the crop would run far below normal had been a principal driving force in US, European and other world feedgrain markets during the summer months, spilling firm price sentiment into wheat and oilseed prices too.

The later-developing US soybean crop's outlook remains a bit more problematical but, if it too can avoid an early frost or harvest washout, it will, if smaller than last year's, be adequate alongside abundant carryover stocks from last year.

In the wider context of a global soya glut, some might argue a smaller than expected US harvest would be no bad thing for prices, for farmers' incomes and subsequent harvest prospects. USDA's new forecast is about 98.9m tonnes – down by a hefty 24.8m tonnes on the year but, like maize, supplemented by large stocks – in this case a massive new record 27.4m tonnes – compared with the previous three year's range of just 5.35/11.92m tonnes.

A competitive wheat export market weighs on prices

The third major factor in the US crop equation, winter wheat, has already been successfully harvested and production is turning out bigger than expected earlier – though some quality questions were earlier raised for the largest component, hard red bread wheat (HRW).

The smaller, quality-important spring wheat harvest is running later than normal but at this stage, is still expected to come fairly close to last year's level and will, like the other components above, be supplemented by larger carryover stocks.

Elsewhere on the feed-grain map we have already seen the Latin American maize and soybean crops arrive in the late spring and early summer in largest-ever volume. These are still being sold into export channels at a record pace and along with its squabbles with China, keeping the USA's market share for these at lower-than-normal levels.

The competition in the maize market has been further enhanced by Ukraine's heavily export-oriented crop – originally seen lower than last year's, now above even that record level, so also taking a larger market share at the expense of the US and others.

At the front of most reviews of the wheat situation remains an estimated record global crop of 765m tonnes (plus 34.7m or 4.7%) to which can be added yet another huge carryover stock, the latter expected to expand by some nine million to an all-time peak of 286.5m tonnes by the close of the 2019/20 season (next June 30th).

That's equal to almost 38% of global consumption needs – a very loose stock/use ratio indeed.

On the demand side of the market we have world total wheat consumption expected to increase by about 2.8% this season – its fastest expansion in three years after a slack period since – if still not enough to stop those stocks building.

Maize consumption – which grew 4% last season is actually seen dropping by 0.4%, a large part of that in the US itself but stocks are still seen tightening by 7 or 23 tonnes.

World soybean demand grew by a slower than usual 1.7% in the past season (2.4% in 2017/18 and 4.7% in 2016/17) mainly due to top meal consumer China cutting back usage in response to a domestic outbreak of African Swine Fever and tariffs blocking its purchases from the USA. As a result, world surplus soybean stocks are estimated to have jumped to 112.4m tonnes versus the (already high) range of 80/99m in the previous three years.

This overall picture of surplus for the three largest food and feed commodity sectors has brought an end to the mini-boom we saw in summer feed-grain and wheat prices. The retreat has been enhanced by recent news that European and Ukrainian wheat crops are turning out bigger than expected and, amid a plethora of choice of alternative sources, contributing to the current perception of strong competition for wheat export markets.

Wheat has lost near one fifth of its value

The effect on prices that were looking so frisky in July has been startling. The bellwether CBOT wheat futures market has shed about a fifth of its peak summer value, maize futures one quarter of theirs. Wheat would be even cheaper had Russia got the crop recovery most market observers expected earlier in the growing season and Australian output not been damaged again by dry weather.

Soybeans have fared rather better – down about 6% recently - but only because of uncertainty still, at this stage, about the eventual size of the US crop. Futures markets still suggest wheat could firm up over the coming year by 5% to 6%, maize by as much as 13.5%, soya showing less recovery potential.

Market weakness in wheat has recently been led by the usually more valuable hard winter and spring wheats, prices of which have hit 14 and 10-year lows respectively. Analysts cite this year's bigger US hard red winter wheat crop and downward pressure coming to bear from a larger Canadian spring wheat harvest (+5%).

Earlier in the season, the only real concern in the wheat market was about the proportion of higher-grade milling wheat that might be available for flour-making. Those concerns appear now to be diminishing, underlined by the recent drop in export costs of US milling wheats to some of their cheapest levels in over a decade.

As well as a decent North American crop, top EU exporter France has higher proteins than last year, compensating for a probable drop in second largest supplier Germany's quality in its Northern exporting regions which suffered from a rain-delayed harvest.

Russian and Ukrainian crops are reported to contain a higher proportion of good milling wheat this year too. On the downside, Australia, normally a key source of quality milling wheat is into its third year of drought and may turn in a significantly smaller crop than earlier expected – but will still be in the running as a major exporter. Another former member of the 'Big Five' exporters' club, Argentina, has meanwhile expanded its production and is stepping up sales of bread wheat.

Wheat prices will also be determined by the progress of major exporters' sales. Despite all the gloom about competition and a strong dollar, US exports have actually been running over 20% higher than last year's. If that pace continues (well ahead of the USDA's official forecast +4%) it could steady up prices.

EU milling wheat prices have been under downward pressure after a slow start to the export season here. But even in the face of intense Ukrainian and Russian competition, the bloc's shipments have since moved well ahead of last year's, thanks to a weakening euro sharpening prices. Still, traders here are under no illusions about their need to stay competitive.

Will importers respond to the cheaper wheat prices and buy more or delay purchases as long as possible to benefit from possible even better bargains ahead? Traders will be closely watching big hitters like Egypt, Algeria, Turkey and Saudi Arabia for clues to buyer psychology in the weeks and months ahead. All have been quite active during late-August or early September.

EU milling wheat prices hit 'life-of-contract' lows this month, their cheapest levels in well over a year as traders here fretted about undercutting competition from Ukraine, Russia and Argentina. Ukraine is exporting a record crop and Russia likes to 'front-load' its sales before rivals are fully harvested.

It has been slow doing so this year, but its prices have been easing for some weeks now (despite its smaller than expected 2019 crop) as exporters try to compete with cheaper Ukraine and Russian sales have done well recently to top customer Egypt.

The big EU wheat exporters, France, Germany and Poland have also been looking anxiously at internal competition from good quality, cheaper wheat from the bloc's Northern Baltic States. France has a lot more to dispose of this year and could end up with larger carryover stocks.

German traders, usually more influential in the quality market, meanwhile expect protein downgrades in some key Northern exporting regions to push more of that grain towards North African countries normally buying French soft wheat. Overall, the EU needs to export about 18% of its wheat crop and has about 10% (13m tonnes) more to ship this year whereas the US has to export half its harvest.

Even if global wheat imports recover by some 3.4% as USDA expects, they will only be back to the average prior to 2018/19, accounting for under a third of the expected increase in world consumption (the remainder fed by domestic crop increases).

Maize cheapest since May

Improving weather forecasts have brightened US maize crop prospects and pushed prices down to their cheapest since May, close to their seasonal lows. The current outlook is for adequate supplies in the price-trend-setting US market where consumption in the feed sector, in ethanol fuel and exports are all looking shaky.

President Trump's officials are racing to complete a rescue package for the ethanol industry which has been damaged by the administration's earlier waivers on blending mandates. Ethanol absorbs over 40% of US corn – the world's largest source of the grain.

Export potential remains under threat from this year's larger South American crops, much of them still to flow onto world markets with another planting season just around the corner. Ukraine's approaching record, harvest is also hanging over the global and EU feed markets. But it could have been worse, price-wise for farmers, had US planting not been delayed and downsized by rain and cold weather earlier in the year, causing a late harvest.

Brazil achieved a record 7.65m tonnes of exports in August aided by a big crop and its weak currency cutting fob prices in dollars. Argentina is also using a weak peso and a good harvest to sell into markets normally serviced by Europe or Ukraine but may swap some maize acreage for cheaper-to-grow soybeans this autumn.

US export sales for the season to date are running almost 18% lower than at the same date last year after losses in Asia, North Africa and Latin America. In the just finished 2018/19 season, the US has held a 30% share of the global maize export market versus Brazil's 22%, Argentina's 19% and Ukraine's 17%. In the previous year the US took almost 42%, the LatAms 16% each and Ukraine about 12%.

Maize imports meanwhile continue to pile into the EU to meet another season of expected large deficit, albeit down a bit on last year's amid better wheat supplies to compete in feed outlets.

China's farm ministry cut its corn consumption forecast by 2m to 280m tonnes reflecting a pig herd downsized by African Swine Fever outbreaks. Chinese maize demand in total demand had grown by about 50m tonnes in the last four or five years to meet expanding pig and poultry needs but, holding huge stocks after years of surplus, it has been trying to curb production.

Plentiful soya likely to stay cheap

If the late-running US crop can avoid weather damage prior to harvest, record domestic and global stocks and continued larger than usual crops from Latin America are likely to keep soya prices nearer the low end of the past year's price range, encouraging for meal users, given soya's dominant role in the sector. Current soya prices are actually surprisingly close to levels seen this time last year – before the full extent of current surplus was clear.

As well as final US crop progress, the market needs to see how much the Latin Americans plant next month for their 2020 crops and what sort of weather they get over the next four or five months. Dryness was recently raising the possibility of planting delays in Brazil's top two soya states but that could fade if a wetter forecast proves accurate.

Soya prices will also be heavily influenced by the outlook for US trade with China. If they can get an agreement – which was looking more likely as we went to press (though past constant upsets demand caution) – China could start to buy more US beans, lifting values initially. That said, China's Swine Fever outbreak could continue to depress its soya meal use, reducing bean imports in total – a concern that might slow the expansion in Latin American sowings this autumn.

Surprisingly, Brazil was recently reported to be getting low on stocks in its attempts to keep supplanting US beans on the Chinese market. If Brazil does find current and past crops have been over-estimated, that could support soya prices going forward. Lower than usual Brazilian proteins might also hurt its sales to China.

US proteins are, as usual, lower still than Brazil's but ideas this situation might lead to tighter contract specifications, possibly needing some price discounting could be bearish.

Less rapeseed in 2019/20

The global canola crop is turning out much smaller than expected for the 2019/20 oilseed product season that starts October 1st. The latest USDA forecast is cut almost one million tonnes due to smaller than expected European and Australian crops although a wide range of estimates for top supplier Canada suggests some leeway for a possible upward revision too at some later stage. Also, Canada is carrying forward record canola stocks after losing at least 1m tonnes of trade to China over a political squabble.

Demand for the primary crush product – rapeseed oil – is no longer rising in Europe where massive use in biodiesel has flattened out in recent years. By drawing on stocks, global rapeseed crush should not be far off the average of recent years, keeping meal supplies up. In any event, adequate supplies of still cheap soya – the dominant factor in oilmeal protein consumption – should help keep prices in this sector grounded. So, should this season's expected larger sunflowerseed crop, expected to compete with rapeseed more this season in European markets.

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