Grains prices in late summer rally

At the time of going to press, the regular update from the US Agriculture Department and the International Grains Council still expect a record global wheat crop. With world consumption showing little growth potential, it points to historically large carryover stocks into the next (2021/22) season too. So why did wheat prices recently embark on a steep, near 20%, late summer rally, from July's 10-month lows to five-month highs?

'Sentiment' seems to be the key factor, the mix of market emotions and intuitions that often over-ride perceived 'fundamentals' of supply and demand. Still there have been some supportive signals from the latter direction too.

Top of the list has been the constant shrinkage in estimates for this year's EU crop, recently seen 12% or more lower than last year's – the loss of about 20 million (m) tonnes of supply after winter sowing difficulties, droughts and other weather challenges lopped area and yields, especially in top supplier France, where latest figures point to a 25% decline in production and as much as 40% in exports. Several east European countries were hard hit too, so the EU's total contribution to the global export supply will be down sharply in the year ahead (a trend already showing in early season sales and shipments).

Traders have also been concerned about drought and frosts slashing a once-promising crop from seventh largest wheat exporter Argentina – though some recent rains there may have rescued it from the worst-case scenarios (minus 50%). Some estimates had ranged down to 18/19m tonnes but the USDA's latest is 19.5m versus last year's 19.8m tonnes.

This year's Ukrainian harvest has also been a disappointment, reduced by some analysts to as low as 26m tonnes but the USDA is at 27m versus last year's record 29.2m tonnes.

On the plus side of supply, though, these losses should be heavily offset by bigger crops in Australia, Canada and Russia. Australia has had some further dry weather issues, but recent rains have strengthened market confidence in a steep revival from two drought-reduced harvests. The government body Abares forecast 28.9m tonnes and the USDA 28.5m against last year's mere 15.2m tonnes.

The latest Canadian official crop forecast has, meanwhile, been raised to 35.7m tonnes versus last year's 32.3m – though the increase is mainly down to a much larger durum/pasta wheat crop rather than milling/bread wheat, the main driving force in the global wheat price. Some Canadian analysts have questioned the accuracy of this estimate based on modelled satellite imagery rather than farmer surveys (due to COVID-19 restrictions) and gathered before some recent adverse weather possibly trimmed yield prospects. Against that, some private estimates have been far higher than the official one in recent weeks, so USDA is still sticking with 36m tonnes.

Russia, as so often, is a factor that seems to cut both ways with wheat bulls and bears. On the one hand, its crop is certainly looking much better than last year's – estimates ranging from the USDA's 78m to some private analysts at 82.5/83.3m tonnes. If Russia has produced as much as 10m or 12m tonnes more than last year, it should certainly be able to export more than the 37.5m recently forecast by USDA (up by only 3.3m tonnes on the year). But while Russia has got off to brisk start with sales to some of the biggest markets (including supplying 80% of top buyer Egypt's imports for the season to date), some more bullish noises have been coming out of trade and official circles there. Trade chatter suggests Russian deep-water ports already working to their maximum capacity and that transhipment costs might be going up. Russian fob (before freight) offers also rose steeply in late August/early July – although this could all be designed to lift prices at time when Russia's earlier-harvested wheat crop is being most heavily sold for export.

In (second largest exporter) the US itself, traders report a good quality soft red winter wheat crop and, so far, good grades coming from the higher quality spring wheat harvest (which was about 80% done). The North American hard wheats will, as usual, be needed by European and other importers to top up for their flour quality. Total US wheat output is still seen around 50m tonnes versus last year's 52.3m, consumption at 30m (steady) and ending stocks down 3.2m at 25.2m tonnes.

On the demand side of the market, world consumption is seen increasing by just 3m tonnes this season as lower European offtake (down 5m) is offset by higher Chinese demand (+4m tonnes) and Indian use (+3.4m). In terms of export/import, where world wheat prices are 'made,' trade is actually seen lower by 2m tonnes as higher North African needs are outweighed by lower imports into Turkey. That said, markets need to keep an eye on China. Despite estimates that it holds over half the world's wheat stocks (150/160m tonnes), a lot of this (if the figure really is that high) is believed to be lower grade grain requiring imports of better qualities to blend into decent flour. Chinese imports rose from 3m-to-5m tonnes last season and are seen increasing to 6m at least for 2020/21. US exporters are already selling more to China – almost 1.5m tonnes shipped so far this season against hardly anything this time last year. They are hopeful the figure will end up far higher as PRC attempts to fulfil its US ag product imports under the 'phase one' trade pact signed with President Trump at the turn of this year.

US traders are also hopeful that they'll benefit from this year's long decline in the value of the US dollar versus a number of other major currencies, making their export prices more competitive to a number of potential importers. US export sales to date are already running 9% higher than same time last year, whereas the USDA has been predicting a tiny 1% increase. If it's sustained, a US export renaissance could certainly lift its futures and physical prices further, spilling strength into world wheat markets.

So, could increasing interest from speculative funds and others looking at possibly 'undervalued' wheat prices be seen as an opportunity to make a cheap, low risk investment? Futures markets offer only a modest forward premium or 'carry' – about 4% for CBOT wheat for delivery this time next year, maybe nearer 8% more by 2022 – a timespan that (given that the crops for that season aren't even planted yet) renders it no more than guesswork. That said, some 'outside' investors are said to be keeping an open mind about commodities per se, as a worthy hedge against inflation, if the dollar stays weak and prices start to run away when governments try to repay the eye-watering sums spent to rescue the COVID-crashed world economy (which, of course, may affect prices across the board of grain and feed ingredients).

European wheat prices have followed the firmer US trend with 9% plus gain from the lows they hit in June, when the domestic crop was seen higher than it is now. Some restraint has been demanded by bouts of euro-vs-dollar strength and by the likelihood that weak EU exports will offset its lower crop. Firm maize and soya markets have also offered support to wheat prices on both sides of the Atlantic.

Attention will soon be turning to the Northern Hemisphere's autumn sowing campaign. Will European weather normalise after an excessively wet start last year? They will doubtless want to sow more to make up for the losses above. Will Ukraine get more normal rainfall? Will US farmers, some facing drought conditions, get the rain they badly need as we go to press? And will the southern hemisphere producers continue to escape drought damage? The next few months will be interesting.

Other factors to watch

  • Will a swift arrival of a COVID-19 vaccine slow or reverse the weak dollar trend?
  • US ending stocks are forecast lowest for some years, still hardly tight but may stir more planting
  • France had its smallest wheat crop in 25 years. Will it plant to the hedgerows this autumn?
  • Russia earlier said it might need to use export quotas in second half 2020/21 to protect its domestic consumers – unlikely now as its crop forecasts rise?

US maize futures at five-month highs

Some of the recently-renewed strength in wheat prices has been down to spillover from the US maize and soybean markets as analysts have marked down weather-affected crops for both these commodities.

Drought has been a key issue while a surprise summer storm, hitting one key state, Iowa, especially hard, has also dented previously stellar yield prospects. With some states in more promising condition, the maize crop will probably not be a small one. However, the USDA has been forced to cut its estimate by a further 10m tonnes this month to 378.5m versus last year's 346m and the previous three-years' range of 385/364m.

The US currently faces mixed export competition in 2020/21. Ukraine's crop forecasts are in a wide range of 38.5m-to-33m tonnes versus last year's record 35.9m. Some have suggested its exports, already running 20% under last year's, will drop to between 26m and 28.5m tonnes from earlier forecasts of 33.5m and last year's record 30.5m – though that would remain well above the average of years before 2018. Ukraine has been a key source of EU maize imports.

Second largest maize supplier Brazil's exports have been falling in the late summer, but the USDA forecasts its next crop will jump from last year's 102m-to-110m and some local sources are even higher – so more seems likely to come from this source in 2020/21 season. However, Argentina, with an unchanged crop of 50m and growing domestic demand, will likely export a bit less.

Largest maize importer, the EU, continues to take in less than last year, down 30% so far. The USDA forecasts a 22% increase in this trade in the coming season assuming an EU crop of 66.3m tonnes versus EU grain trader body Coceral's forecast 64.6m tonnes.

US export sales have meanwhile picked up markedly, thanks in large part to a surge in demand from China as it attempts to meet farm trade promises to the US under the 'phase one' agreement made between the two countries at the turn of the year. It may also reflect a tightening supply within China. That may sound strange, given that PRC is supposed to be holding over 200m tonnes – about two thirds of the estimated global maize carryover stocks. However, as in the wheat market, the quality of these large inventories is unknown. Traders have also noted that the Chinese government's regular auctions of these stocks has met strong demand as domestic maize prices have been soaring, contributing to food price inflation.

Further large imports could help solve that problem and would obviously go down well with US suppliers. The USDA currently expects China to produce 260m tonnes of corn this year and consume 279m, importing about 7m tonnes. China's stocks estimated by USDA at some 201m tonnes at the start of this season are expected to drop by about 12m.

Factors to watch

Dry weather could affect Argentine crop prospects, reducing its exports, but Brazil's could be 3m-to-5m tonnes above the USDA's 110m estimate, allowing more.

Some improvement has been seen in US production of corn ethanol, normally the outlet for over 40% of the crop but the green fuel has yet to return to this season's peak level amid COVID-19's impact on transport use.

A higher US consumption forecast of almost 318m tonnes also includes 5.7m more feed/residual use. US seasonal exports are seen leaping 23% to 58m tonnes, potentially bullish for US prices but possibly over-optimistic?

Will relatively cheap corn attract more global import demand as the USDA expects? The CBOT price was heading towards $3/bu (about $118/tonne) in April of this year, when it was cheapest since August 2016 but has firmed up since. Farm prices are seen around $3.60 in 2020/21, similar to the past two seasons which may be enough to sustain acreage in 2021.

Beijing is to release large quantities of rice and wheat for the Chinese feed sector – which may curb its maize import demand.

Soya price near 2¼-year highs

Soya prices have risen sharply amid declining US crop estimates, a surge in Chinese demand for US beans and the seasonal decline in supplies from Latin America (next crops first quarter 2021 onward).

Initially the US expected a surge in plantings and better weather than last year's washout to raise the current crop by as much as 23m tonnes. Now, after droughts and summer storms, the forecast recovery has been trimmed back to under 21m which with starting stocks more than a third lower than in 2019, suggests are far less slack market than expected a few months back.

A big question is to what extent US exports may revive in 2020/21 after two very sub-par years (average 46.3m tonnes versus 58.6m for the previous two). Chinese demand has picked up but remains a hostage to frequently fraught political relations between the two while some other traditional markets have been more lacklustre.

The markets will soon be looking to the weather in Brazil, then Argentina to gauge next spring's Latin American competition. Recently larger estimates have been coming out of chief export rival Brazil where government body Conab has forecast 133.5m tonnes against the USDA estimate of 131m. Argentina's next crop is forecast 3.8m tonnes higher at 53.5m b ut exports may not expand much amid lower starting stocks and higher domestic crush.

USDA's meal price forecast for the coming season is $347/tonne – about 5% higher than the past marketing year.

Demand for US beans has fallen in Latin America – especially Argentina, where US material was required to backfill crush needs after the South American country's steep crop decline last season.

US crush has been going strong, partly to feed higher meal and oil exports. Processor body NOPA recently reported the highest crush on record for July at some 172.8m tonnes.

Brazil has been pricing itself out of much export business recently after its earlier strong sales depleted supplies – another reason why China has been turning more to North America. China is also seen raising its soya crush to a new record 98m tonnes.

CBOT bean futures remain at the low end of their recent five-year range.

Tighter rapeseed prices at two-year highs

Canada raising its 2020 rapeseed crop forecast failed to stop the price on the bellwether Winnipeg futures market trading two-year highs this month - over C$5/bushel. The low point of C$4.30's was reached in May last year. Government body Statistics Canada estimates the crop at 19.4m tonnes, 100,000 less than last year but 900,000 higher than an earlier forecast. Some analysts have questioned its accuracy as COVID-19 restrictions prevented farmer surveys, leading to a switch to satellite modelling while the estimate was made before some weather issues that could trim yields (droughts and frosts).

Some private estimates had ranged up to 21m tonnes. Canada's starting stocks have also turned out sharply lower than expected, further boosting prices. The crop has been in strong demand both domestic and exports as other markets like Europe have filled the gap left by less going to top buyer China. The European market continues to look tight after another poor crop and a disappointing harvest in key EU supplier Ukraine, albeit offset by a better crop forecast for another exporter, Australia. So far this season EU rapeseed imports have been slow, partly due to competition from much cheaper soya and sunflowerseed and their meals which analysts think could continue to cap rapeseed's upward price potential.

The USDA recently estimated the world rapeseed crop at 68.5m tonnes. Ukraine's crop is down from last year's 3.5m to 2.5m tonnes, Europe's similar at 16.8m but there could be an extra 1m tonnes from another exporter, Australia. As usual, rape meal costs will depend heavily on the price of the dominant meal, soya.

Finally, sunflower seed output is expected to take a modest dip after several years of growth – dropping 1m tonnes after a fairly steep 1.8m tonne decline in Russia outweighed better Ukrainian output.

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