December 2018

By John Buckley


Global wheat markets have remained volatile, if broadly "range-bound" over the past month or so. The bellwether CBOT futures market initially tried again to turn higher on a not unexpected further cut in Australia"s crop estimate.

The official forecast for that has now come down from 19.1m to 16.6m tonnes, versus last year"s 21.3m, and the previous season"s record 32.1m tonnes. Its smallest harvest for some years will certainly reduce Australia"s export role – the Grains Council now thinks it will ship just 10m tonnes, versus last season"s 14m, and 2016/17"s 22.6m - a big chunk out of what is normally higher-grade wheat export supplies.

Coming on the heels of Russia"s surprisingly large crop shortfall (estimates are now down to 70m from last year"s record 85m tonnes), it further tightens the importers" choice of suppliers. Russia"s farm ministry recently chopped its forecast for this season"s wheat exports to 30.6m tonnes – 4.4m less than the USDA has forecast and up to 11m tonnes below last year"s record performance.

That said, Russia shows no sign yet of a serious retreat from the world export market. Its prices have risen steadily in recent months, especially after reports that its quarantine authorities were stepping up their control of exports through increased quality testing procedures.

Such means have been used in past years of crop shortfall to conserve supplies for the domestic market. However, some shippers suspect this may be a ruse to boost market value, and with it, Russia"s income from the reduced volume of exports. The fact that Russia continues to constantly undercut the competition, dominating contested tenders held by big buyers like Egypt, lends some credence to that view.

However, for the time being a likely fall of some seven million to 11m tonnes in Russian exports should at least curb its expansion plans into regions including Asia, the Near East, Africa and Latin America, previously dominated by the other big suppliers. That all helps steady the wheat price.

Recent reports have highlighted the likely further loss of EU export business in the key MENA region (Middle-East/North Africa). Russia has already taken a large slice of this 50m-tonne-plus market (about 30% of total world wheat trade) and aims to expand its presence in countries such as Algeria and Libya.


At the time of writing, CBOT prices had shed a large portion of their earlier gains as traders re-focused on the broader adequacy of supply and still slack demand for US and EU exports. Further downward revisions to this season"s world wheat trade in total by USDA and the International Grains Council also helped keep bullish sentiment in check.

Also, on the bear side, were the International Grain Council"s (IGC) latest global crop estimates - actually adding 12m tonnes to the world total. However, this was mostly due to larger than expected output and stocks, revealed by the government in China, which is generally considered a fairly neutral factor on the world scene, due to its highly controlled internal market.

Furthermore, the extra wheat is thought unlikely to affect China"s usual need for some four million tonnes of imports of higher-grade grain, to boost flour quality made from its mainly lower/middling grade domestic crop. The IGC also added some to its crop estimates for Russia (one million tonnes), Europe (800,000) and the US (200,000 tonnes), all helping to offset the above reduction for Australia and a smaller cut for Argentina too (down 500,000).

the latest wheat rally seems to have been brief, prices that are still 25 percent higher that, at this time last year, have been welcomed by farmers. They also seem to be encouraging increased sowing in several countries which, weather permitting, should set the stage for a larger wheat crop in 2019.

For the nearer term, though, markets are more preoccupied with the question of when Russia"s crop shortfall – and its probable diminishing supply of higher quality wheat – will allow the US and Europe to recover lost export trade.

The US is actually managing to sell some wheat to Egypt for the first time, since May last year, has encouraged many US analysts to speculate that an export revival could now be just around the corner. The US contributed only 60,000 tonnes to a 470,000 tonne Egyptian tender, (which was again dominated by Russia and also shared a further 60,000 with Ukraine). However, it showed the US was now getting competitive for (origin port) terms - if struggling still to quite match the cheaper freight costs from the Black Sea into contested markets around the Mediterranean.

There is also the question of the still frisky US dollar pushing up the real cost of grain. It all behooves the CBOT futures market not to get too carried away when the breeze blows bullish, if it wants to recapture its once-dominant place in world wheat supply.

Current season"s US exports are still running 16 percent down on the year whereas the USDA is still forecasting a 26 percent (six million tonnes) seasonal increase with the US marketing year already nearing the halfway mark.

EU is doing no better, its own export shipments down by a hefty 24 percent - in sharp contrast to the USDA forecast of similar trade to last year"s 23m tonnes. Along with the firm euro, this has constantly put paid to several wheat price rallies in Europe. EU wheat consumption is also expected to drop by four millon to five million tonnes this season, which should help prevent pipeline stocks falling below a manageable 10m tonnes at the end of the season, again tending to work against higher costs of milling or feed wheat (the notable exception being Germany, where a short crop has left feed wheat users so short that prices have risen above those of milling wheat, dragging in unusual imports of feed).

EU export trade might expect to get some support eventually from reduced competition from Russia and Ukraine as the season progresses, the latter"s shipments also lagging last year by over 6 percent and its supply of quality wheat, like Russia"s, down on the year. However, new crop Argentine supplies should be arriving by the turn of the year, keeping French wheat exporters on their mettle. Also, in the export fray, Australia"s supply, though much reduced, will still count for something in the price-setting process.

So will Canada, finally finishing a rain and snow-delayed harvest and with a lot of export selling to do in the months ahead – albeit possibly with some quality questions to answer about the wheat brought in on the back end of its harvest.

Fortunately for quality wheat importers, the US continues to expect a large crop of hard red spring wheat – around 16m tonnes compared with last year"s 10.5m. Some US traders suggest that will enable it to hold the pivotal position in high-protein wheat supplies as the season progresses.

The main US winter wheat crop believed to have been sown on a larger area this year (for harvest 2019) has meanwhile got off to a good start moisture-wise, after several recent years of widespread drought conditions (during which crops mostly survived surprisingly well). There has even been talk of too much rain adversely affecting some newly-planted winter crops, but traders have generally played this factor down, remembering the old adage, "rain makes grain".

Argentina is expected to overtake Australia as fifth largest wheat exporter at some 13.5m tonnes for a second year running. In the earlier part of this decade, it shipped as little as 1.2/4.2m tonnes. Argentina is also seen a growing competitor in EU export markets including the top French customer Algeria.

European growers were also reported to be favouring more valuable wheat crops over oilseeds during the autumn sowing season. Dry weather may also be an issue helping to turn EU farmers from rapeseed to winter wheat. In the Black Sea region, recent drier weather has sped lagging plantings in many regions and crops appear to be getting reasonable conditions for germination and early development.

The IGC recently said world wheat area could rise for 2019 crops for the first time in four years. It"s an interesting thought that had Russian, EU and Australian crops not suffered serious shortfalls this year, the world wheat market might be in surplus in 2019/20 for a sixth year running and prices closer to the decade-plus lows seen over the past two seasons – which would have been unlikely to have supported this sowing revival.


Going forward

· With Northern hemisphere winter-sown wheat crops in the ground on a larger area and, so far, enjoying mostly problem-free weather, the stage is set for a possible world production rebound in 2019 (this year"s crop fell by an estimated 28m tonnes).

· World wheat stocks start about 15m tonnes lower than last year but are by no means tight in historical terms. Consumption growth is slower than in some past years and import demand is seen contracting slightly, offering no obvious justification for further steep pride rises at this stage.

· The CBOT futures market has soft red winter wheat prices about 12 percent dearer than now, by this time next year, and up to 16 percent more for third quarter 2020. In contrast, Paris milling wheat futures are quoting 5 percent cheaper a year ahead.


Maize braces for another huge US crop

Like wheat, CBOT maize had a brief price run-up in the last few weeks as trade and speculative buyers were enthused by reports of busier US export trade amid concerns that wet harvest weather might reduce quality or trim yield potential for the USA"s expected bumper harvest.

Farmers, already dissatisfied with low prices, naturally tended to pull up the drawbridge, concentrating on getting the crop in rather than selling it forward. It all helped the US maize futures market jump to four-month highs.

More recently, the market has backtracked again. Traders have played down crop damage and with over two thirds "in the bins" as we went to press, the second largest US crop on record still seemed on track. At the same time, US export trade went off the boil, delivering a series of disappointing weekly results. It all helped refocus market sentiment on the relative adequacy of supply, not only in the US itself but from larger crops being planted in Brazil, possibly Argentina too.

China stunned the maize market in early November when it revised its historical data for its own maize production, raising crops going back to 2007. The revisions included the 2017 crop going up from 216m to 259m tonnes. That threw an almighty spanner into the works as the USDA finalised its latest world maize supply/demand forecasts.

This meant adding 31m tonnes to China"s 2018 crop (now 256m) and, after accounting for over a decade of much larger Chinese surplus, boosting the current season"s Chinese ending stock forecast from 58.5m to 207m tonnes.

Bigger than expected US stocks and lower consumption estimated in USDA"s recent reports (indicating US feed use had been over-rated) were a reminder that corn supplies are far from tight. Bearish traders have also noted Ukraine"s much larger 2018 maize crop – up from 24m to 33.5m tonnes - which will allow a big jump in exports, the lion"s share of these coming into Europe. In fact, the EU will be easily the world"s largest maize importer in the recently started 2018/19 season, taking an estimated record 21m tonnes against last year"s 18m and a range of eight million-to-15m in the previous three years. Next largest buyer is Mexico around 16.7m, then Japan at 15m.


Going forward

· The Buenos Aires Cereal Exchange recently forecast fourth largest corn exporter Argentina"s next crop at a record 43m tonnes – more than a third bigger than last years. Local analysts project the next Brazilian harvest at 96m tonnes, versus last year"s 82m.

· Further forward, next year"s US sowings are seen three percent higher than this year"s as farmers abandon some of their soya crops.

· US physical maize prices in the season ahead are currently seen in a fairly wide range either side of the past season"s average US $3.40/bu (ex-farm). The CBOT forward futures market projects US maize values one year hence about eight-to-nine percent dearer than they are now.

· Prices will be influenced by the eventual outcome of Latin American crops (subject to whether a forecast El Nino climate event brings good or bad weather), by the extent to which US spring sowing matches forecasts and whether an El Nino brings any unusual US summer weather.


Soya continues to restrain oilmeal costs

Oilmeal costs have remained under control from huge US soybean supplies and price weakness stemming from the USA"s inability to make its usual large seasonal sales to top importer China. China"s 25 percent tax on bean imports from the US – in retaliation for President Trump"s rebalancing trade sanctions again the PRC – has resulted in China choosing to get most of its imports from Brazil instead.

This has pushed up Brazilian soya prices – so much so that China could actually get a similar deal on US beans including the tariff. But no Chinese crusher wants to risk buying cargoes that could be subject to other taxes or controls before the vessel arrives.

Despite constant talk of a possible breakthrough in the US/China trade deadlock, this could have longer term implications – not just for trade but for soybean supplies. Many US farmers, dismayed at their loss of their largest market – and the consequent slump in the value of their crops, are now talking about cutting back on bean acreage and putting in corn instead.

A recent USDA appraisal suggested that could slice as much as 6.6m acres of the national total (at 82.5m) which, with a repeat of last this year"s yields would cut the crop by about 9.5m tonnes from this year"s record 127.6m.

Even if that does transpire, the US is expected to start the next season with a massive leftover stock of 24.1m tonnes of soybeans compared with 11.9m this season and a range of 5.2/8.2m tonnes over the previous three seasons. So, US supplies would still hardly be tight. Part of the reason for that is the loss of Chinese trade which has been only partly replaced by growth of trade in other markets for cut-price US beans.

On top of this, Latin American producers, emboldened by their business windfall from China – and expecting a recovery in yields from the past season"s weather-reduced levels – are expected to between them grow over 187m tonnes (Brazil, Argentina and Paraguay), about 20m more than this year. Weather, so far, has been ideal for rapid planting and with no real moisture shortages so far, these are reasonable figures for forward planning assumptions on supply.


Key features of the soya market going ahead

· Huge US old crop supplies from the last record crop

· No sign yet of the US winning back lost China export trade

· As well as buying South American only, China are trying to cut its soya use in total by as much as 11m tonnes by using other protein sources

· Argentina and Latin America expecting huge crop rebounds early in 2019

· Brazil probably harvesting earlier than usual after a fast start to its planting season

· US farmers turning away from soybeans next spring – signally a smaller crop but massively offset by those large starting stocks

Despite this largely bearish picture, CBOT soya futures are projecting a forward soybean price more than seven percent higher one-year hence – although USDA itself has a seasonal average forecast for domestic soya meal prices averaging around US $310, versus last season"s mean $345.

In Europe, as the chart shows, soya meal prices have continued to ease in terms of the US dollar. While the greenback has been climbing steadily this year, the euro has also enjoyed some bouts of strength, softening that impact.

Analysts have forecast a 25 percent drop in China"s fourth quarter 2018 imports to a 12-year low of 18/20m tonnes and the USDA has just cut its forecast for seasonal imports by four million tonnes, all of which comes off the US export total. The Chinese market also remains exposed to the risk of swine flu outbreaks. reducing feed demand. China has also been constantly auctioning off reserve soybean stocks to reduce its import needs.

The USDA has been factoring in China still consuming more soya meal this season than last, but as indicated above, that may not come to pass. Also rising is demand in the producing countries – US, Brazil, Argentina – and in Europe. In total, USDA sees world consumption plus 10.3m tonnes and, as usual, soya meal accounting for most of the growth in world oil meal consumption in total.


· Australia"s official forecaster ABARES recently knocked 20 percent off its current rapeseed crop estimate which, at 2.2m tonnes now stands 1.4m down on the year – the smallest crop for nine years after a devastating drought. Two years ago, it produced 4.3m tonnes.

· French analyst, Strategie Grain, estimates EU winter rapeseed planted area will drop nine percent to a 10-year low, due to dry weather and better prices for wheat.

Ukraine"s 2018 crop rose to 2.7m tonnes from last year"s 2.22m and only 1.25m in 2016.

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