By John Buckley

 

Wheat prices have had plenty of bullish input from the supply side in the past month as crop estimates slid for Russia, Europe, Canada and Australia. Markets have looked much readier to respond with firmer prices, the bellwether Chicago futures, nudging three-year highs at one point in early August.

Europe's own milling wheat market also saw one of its firmest periods for some months, Paris futures reaching their highest levels since 2014 although by mid-September, most of the gains on both sides of the Atlantic had been given back.

Russia's crop shortfalls have remained in the forefront of bullish market factors, constant downward revisions to these from both domestic and foreign analysts encouraging rumours that its government would, before long, apply some form of curb on exports after their hectic start to the 2018/19 season (sales plus a staggering 80% at one point recently).

While Russia usually "front loads" its export campaigns, some of that trade frenzy was thought to have reflected exporters and their customers trying to pre-empt any looming duties, quotas or other de facto restrictions that might ensue as crop estimates plummeted to around 67/68m tonnes – as much as 18m below last year"s record harvest.

Russian officials have twice denied that any export curbs are on the cards but that hasn't entirely quelled grain trade doubts about forward sales intentions, if for example this year's apparently lower quality crop (a wet harvest has apparently reduced the milling/feed ratio) does push up internal bread wheat prices further – the best grades having recently traded at a five-year high.

Food price inflation is already a worry in Russia with a weakening of the rouble. On the other hand, while much of the early Russian harvests have shown clear signs of a yield penalty from earlier drought and heatwaves, more recent reports suggest better results from the later Siberian harvest might add 2m or 3m tonnes to recent total crop estimates. If Russian does get around 70m tonnes (the USDA now says as much as 71m), that would still be a reasonable result compared with the average of the past decade.

Analysts at consultant Agritel recently estimated Russia could still export about 32.5m tonnes compared with last season's record 42m, while the US Department of Agriculture is still forecasting 35m. However, some traders have questioned whether the total will much exceed 30m, even 25m tonnes. At the same time, Russia's Sovecon consultancy estimates the country's stocks could fall to a six-year low by the close of this season next June while the USDA puts that final figure at 6.9m tonnes.

Despite all that, Russia, as usual, continues to hog most of the opportunistic import business, especially to the big buyers like Egypt, shipping a record 4.6m tonnes to all destinations last month and expected to reach at least 4.2m in September. It remains the cheap supplier, export prices recently softening from early-August's 3½-year highs of around $234.50 to just $215 for the benchmark 12.5 percent protein milling grades.

So Russian competition has continued to keep wheat exports from both the US and the EU far behind last year's levels. In a season during which the US has been predicted by the USDA to raise its exports by 26 percent to 29m tonnes and the EU to at least keep level with last year's 23.5m, this failure to capitalise on the Russian shortfall has been one of the chief reasons why wheat markets backtracked in latter August and early September.

One or two other factors had contributed to the earlier price rises. Canada's latest official wheat crop estimate came in more than 1m tonnes under market expectations at just 29m tonnes, reflecting drought and heat damage. That compared with the USDA's September forecast of 31.5m which (up 1.5m tonnes on the year) was expected to allow exports to rise from under 22m to about 24m tonnes.

In Europe, meanwhile, the Commission cut its EU soft milling wheat crop forecast to just 129m tonnes, down 9 percent on the year, reducing its export estimate from 21.3m to 20m tonnes.

As the market absorbed these numbers, Argentina announced it was reintroducing grain export taxes as part of its measures to secure IMF backing for an emergency financial package. The new duties will probably not have a big impact on Argentina's wheat export price in terms of the US dollars, in which grain is mostly traded internationally, because the country's peso currency is so weak. But the move might affect the timing of Argentine new crop wheat sales when exports get seriously underway in the New Year.

Some analysts think that holdups in Argentine sales may benefit French exporters who, over the past season, have faced stronger competition from this supplier's larger crops and freer export policies, especially in France's key non-EU market, Algeria. However, that remains to be seen. Argentina is still expecting a large 19.5/20m tonne crop that promises a strong export campaign moving into first half 2019.

Another firming influence on prices has been a drought in Australia's eastern states that threatens to cut the country's 2018/19 crop potential – like Argentina's harvested around the turn of the year. In contrast, Western Australia, the main exporting state, has had very favourable rains, promising larger than usual yields and exports.

However, the eastern regions tend to be where more of the best quality Australian wheat – premium white type - normally grows, so overall, top quality Australian exports are likely to be down in the year ahead. The USDA cut its Australian export forecast by 2m to 14m tonnes in September (versus 15.5m last season and over 22m in 2016/17 when it reaped a record 32.1m tonne crop).

The quality factor could be a firming influence for wheat, moving into the second half of the season once Russia and other suppliers have cleared the lion's share of their better grade wheat into export markets.

Ukraine's wheat crop also seems to be down on quality this year. Some observers suggest milling grades will make up only 45 percent of the harvest and, in some northern regions, as little as 30 percent. So, while Ukraine's exports in total could be within 1m tonnes or so of last season's 17.5m, a lot more of that is likely to be feed rather than milling wheat,

The second half of the season (Jan/Jun) may therefore be when the US finally starts to reap some of the benefits of rivals" shortfalls in terms of improved export business. Not only has the US produced a larger crop this year, around 51m tonnes against last year"s 47.4m, but It also expects a large spring wheat component of around 15.9m tonnes – over 50 percent more than it produced during a drought last year. About half of that higher-grade wheat at least should be moving into export channels.

Going forward, wheat markets have also had to take note of some dry soil issues holding up planting of for autumn-sown 2019 winter wheat crops in Russia and Ukraine, possible other parts of eastern Europe too.

Fortunately, the US at least seems to have had some good rains ahead of its autumn planting season with the promise of more to come. Acreage there is forecast higher by some market analysts.

Carrying about 30m tonnes of stocks into this season last July, the US looks well-placed to capitalise on any shortfalls arising in other exporting centres. Adequate quality supplies have been reflected in US price premiums on higher protein wheats coming down sharply on export markets into the autumn.

Dark Northern Spring 14.5 percent protein wheat recently cost just US $11/tonne more than 13.5 percent against up to US $37 in the early summer, the top grades having fallen by about 26 percent since then. US hard red winter (HRW) wheat, also favoured by US and overseas bread makers was commanding premiums of just US $9/tonne for 12.5 percent protein over ordinary grades versus US $30 in second quarter 2017. About half the US starting stock was HRW and around 17 percent of it hard spring wheat.

In Europe too, quality issues may be one of the price drivers going ahead. The key EU quality producer Germany has lost almost a fifth of its wheat crop this year while harvests have also dropped in some of the other higher-grade suppliers, Rumania, Bulgaria and some northern member states.

Germany's plight was underlined by reports it had to import up to 800,000 tonnes of "Black Sea" feed wheat recently. Tight feed wheat supplies in Germany have been out-pricing milling for months past.

On the plus side, quality in France, the biggest EU wheat producer in terms of volume, seems to be holding up better but this supplier is not usually able to offer the highest proteins. If EU exports do meet the sort of levels predicted, consumption of wheat within the bloc will decline by about 5.4m tonnes to avoid reducing carryover stocks too far.

 

Going forward

Forecast world import demand for wheat has been slashed by the USDA by 2.5m tonnes to 181.8m versus last year's 182.65m with less needed by the Middle East/North Africa region but more going into Latin America, sub-Saharan Africa and Southeast Asia.

Things will be a tighter in 2018/19, requiring stock drawdown of some 13m tonnes or about 5 percent but still leaving a larger than usual carryover. Will US prices in the $5-5.50/bushel range encourage farmers who have watched the market approach $4 in the past season, to sow more in 2019? That may already be happening the US itself.

 

• Australian stocks are seen halving this season after a drought-reduced crop.

 

• US carryover stocks of wheat are seen finishing this season at a still-large 25.5m tonnes, enough to supply most of one year's domestic consumption or exports.

 

• A possible El Nino climate event later in the year could disturb crop weather patterns, usually negative for Australia, maybe more favourably for Argentina.

 

• China's wheat crop seems to be turning out lower than expected and may require larger imports. Last season, it took in 4m tonnes, mainly to boost the quality of its flour grist.

 

Bumper US crop to keep maize costs under control?

Rising estimates of US 2018 corn production may continue to keep prices of the grain under control, even if its exports stay relatively high in the season ahead. Corn costs should also be restrained by expected rebounds in South American crops from the past season's droughts and other weather problems, assuming conditions stay normal over the next six months.

Mostly ideal weather has bumped up forecasts for this year"s US maize yields to a new record 181.3 bushels per acre according to the USDA's latest surveys. Even on this year's lower sown area that's expected to produce about 377m tonnes compared to last year's 371m and 2016"s 385m tonnes.

The US is expected to consume about 5 tonnes more and export about 1.5m tonnes less than last season, leaving ending stocks at a reasonably comfortable 45m tonnes.

Latest USDA forecasts also suggest Brazil and Argentina combined will produce about 19.5m tonnes more maize this season than last. Some think the Argentine figure might be optimistic as planting is slowed by farmers responding to recent tax hikes on their exports, shifting some into soyabeans instead.

Some Brazilian analysts think a similar trend might prevail in Brazil too. The US has been benefitting from the past year's Latin American and Ukrainian crop shortfalls as well as expansion in world maize trade and, despite the "Trump Wall" factor, sustained strong demand from top customer Mexico.

Europe's own maize crop has been a disappointment for a fourth year running, currently forecast at 60.8m tonnes. It signals another year of huge maize imports by the bloc – at 19.5m tonnes, the largest for 11 years. However, stocks are still seen declining from 9.5m to 5.8m tonnes as consumption edges up by 6m to a new peak of 82.5m tonnes (partly replacing feed wheat).

Fortunately for Europe, its key supplier, Ukraine has a better than expected harvest on the way to market – a record 31m tonnes compared with last year's 24m - which the USDA expects to allow exports to jump by 6.5m to 25m tonnes.

Another factor to watch in the months ahead is China, the second largest (after the USA) producer and consumer of maize. Consumption here is growing each year – from an estimated 202m tonnes in 2014/15 to as much as 251m in the 2018/19 season that started in September. China's own crop hasn't grown nearly as fast – by about 10m tonnes over the same period – but the country has for some years been in a surplus position, carrying forward huge stockpiles in its state-controlled strategic reserve (as much as 111m tonnes in 2015/16 – equal to more than half the world maize stock.

Supporting and storing huge maize crops has been an expensive business and China has been trying to curb these in recent seasons, whittling down stocks instead. By the close of this season these may be as low as 58m tonnes – hardly tight but, if this trend continues, perhaps eventually leaving China"s market rather more exposed to any future crop/weather issues.

World maize stocks peaked at 228m tonnes in 2016/17 and are seen around 157m by the close of 2018/19. China has been by far the largest factor in that decline while the US is also carrying forward less.

Is this likely to have much impact on forward prices of maize? Currently the US futures markets have the grain costing about 10 percent more in a year's time while the USDA has this season's average farm price rising by about 5.8 percent. However, that's a whole, as yet unsown, crop away - so only an early pointer.

 

Going forward

• US bio-ethanol production – 45 percent of the country"s total corn use - was reported to have made a strong 5.8 percent on-year gain during July. The USDA has demand from the latter sector up 2.4 percent for the season just concluded and by less than 1 percent for the new 2018/19 year that started September 1.

 

• Argentina has slapped an effective 10.5 percent tax on its exports, a move that some local analysts say will slash corn profitability and encourage some farmers to ditch the crop in favour of soybeans.

 

• A producer survey by analysts at Farm Futures suggests US maize planted area could bounce-back by 1.7m acres (to 90.8m) next spring – an even bigger crop on the way?

 

• Ukraine has also signalled its intention to compete strongly for export business, targeting Europe, now the world's largest maize importer, and China as key customers. That may also challenge US export plans.

 

• Argentina's Rosario Grain exchange has forecast the coming crop at a record 45/46m tonnes – 12/13m more than this years versus the USDA's forecast of 41m.

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