World Grain & Feed Market Review
Wheat price breaks on looser than expected supplies
The international wheat market seems to be coping much better than expected with this season's combined 30m tonne plus crop shortfall from key exporters Russia, Europe and Australia. Their joint exports are expected to fall by about 11m tonnes in total. But this is a year in which the US, EU and Russia itself had stocks that needed to be cleared, when world wheat imports in total are reversing several years of steep growth (forecast 3m tonnes down) and other exporters like Canada and Argentina have been ready and able to fill any gaps in supply.
Most of the data backing this 'back of the envelope' summary has been available for months. However, that didn't stop wheat prices leaping last year to three-year highs (CBOT futures in the $5.70s/bushel or about $209.50/tonne), Russian exporters getting their best returns for four years, EU wheat enjoying a lift off last season's depressed market and the global import cost of the grain doing its best to follow suit.
Yet a couple of months into the New Year, things have been looking very different. As we go to press, the bellwether US markets have collapsed back by some 16% from their January peaks to the mid-$4.30's (13-month lows) and EU milling from €207/tonne plus to the mid €180s. As its supplies of better export quality wheat have dwindled, Russian exports are falling – its prices to, if still far more expensive than usual – especially versus those of its traditional competitors. But there are plenty of them and so it seems, ample wheat to go round. That has been underlined by the competition for recent international import tenders - large buyers like Egypt, Saudi, Algeria, Ethiopia as well as smaller customers like Tunisia, Bangladesh, Jordan etc.
Interestingly, the latest leg in this price downturn has come despite signs that demand from the main export laggards, the US and Europe, has actually shown a hefty recovery. At the last count, US seasonal sales – at one stage running over 20% down on the year, where estimated to have halved the gap. EU exports for 2018/19 to date (late Feb) were still down by 16% on the year but that's a big improvement on 26% a few weeks earlier.
Markets have not surprisingly been focused on how quickly these two exporters can close more of the gap before their seasons end (May 31 in the US, Jun 30 in Europe). And even if they do, at this stage, the US is currently expected to end the season with a still large 26.5m tonne wheat stockpile, Europe a comfortable 14m tonnes.
Moreover both could have bigger wheat crops on the way for 2019. The US might have sown a bit less than intended but its overall weather so far has been more conducive to good yields. Europe has expanded planted acreage by a few percentage points and come through a mostly cooperative winter. The Commission and the EU grain trade lobby Coceral, are forecasting a potential crop gain of up to 10% and French analyst Strategie Grains as much as 15%.
Among the other big exporters, expect Russia to get better yields this year, given normal weather, its lower output last year having been down to unusual heat and droughts. Its farm ministry is forecasting a 4% increase, other observers more. Ukraine, whose milling wheat crop was lowered by wet harvest weather last year, could also have more bread wheat to ship in 2019/20, even if the overall crop, including feed wheat is down a little.
Canada, which had a decent near-32m-tonne crop last year, is clearing it more rapidly than its competitors, its season trade to date running 15.7% up on the year. Along with less remunerative prices for its key competitor canola (rapeseed) that may ensure adequate spring sowings and another large crop for 2019. Early pointers suggest 33m tonnes.
Argentina, after years in the wilderness under previous government export controls, is now firmly back in league of major exporters, expected to ship a record 19m-plus tonnes this season versus just 11.3m three seasons ago. It has had major sales success this season in markets previously considered the EU's own – Middle-East/North Africa – as well as Far East Asia, normally dominated by Australia and now in three-way fight with the latter and the former Soviet countries (not to mention the US, which still has much traditional business in the region). It points to large Argentine sowings again in 2019, a prospect already worrying French and other EU exporters.
Australia is a harder player to call, suffering its third successive year of extreme heat and drought in its eastern regions. That could not only reduce yields but discourage farmers from sowing. So it could be another year of smaller export contributions from this major quality wheat supplier. Overall though, a bigger global crop seems likely. The UN Food & Agriculture Organisation currently forecasts this plus 4% at 757m tonnes.
Are wheat prices finally nearing bottom? Last season and the one before, CBOT had actually gone below the $4/€150 levels - before the Russian and Australian crop problems arguably rescued it from even steeper losses (it touched the $3.50s at one point). While there is possibly more leeway to the downside, forward pointers are mixed. CBOT forward futures suggest a 10%-plus price recovery by this time next year but the EU milling futures contract points to the opposite - a further 5.5% decline into the new crop positions.
Which direction the global market chooses will depend heavily on two key factors. One, as always, is how weather shapes up for the key Northern Hemisphere crops over the next few months. The other, nearer term, is whether consumers see 'value' in these cheaper prices and step up to help clear more of the excess stocks US/EU stocks. If these 'carryovers' end up larger than expected, prices could be subject to more downward pressure, especially if a firm US dollar impedes an export recovery.
- Russia has been dropping hints the state might take greater control of export trade (it wants a new body liaising with exporters, including foreign ones, and analysts wonder how formal that might become. The government insists it doesn't want to curb this season's sales (aware that it must reassure regular buyers who might start to look elsewhere that it remains a reliable supplier) Russia's farm ministry has also raised its 2018/19 crop and export forecasts slightly, helping the US/EU markets on their descent in late February.
- Improved US & EU price competitiveness has been shown in recent international import tenders, beating the now more expensive – and harder to find in quantity – 'Black Sea' wheat. One thing that may help the US is if China adds wheat to its shopping list – assuming President Trump gets his broader trade deal. The collapse in US futures, weighing on prices in Europe, might also help both stay competitive. Cheaper freight is also helping the US with its more expensive transatlantic freight cost to the most contested markets.
- But a slowdown in EU feed use of wheat may add to the bloc's ending stocks..
- India expects a record, near 100m tonne crop - plus huge carryover stocks - that may enable significant export sales. Pakistan is also exporting from a bumper harvest.
- Russia is sowing more for harvest 2019. Officials recently forecast a potential 4% crop increase from last year's 72m versus 2017's record 85m tonnes.
- The US and Canada were the only major exporters to get significantly larger harvests this season.
Maize prices bend with wheat
As a competing feed ingredient, maize has had to reflect the latest steep drop in wheat prices, the CBOT descending to new multi-month lows as we go to press. USDA officials meanwhile see US planted area this spring rising 3.3% to over 92m acres. With average yield around 177bu/acre that could deliver a 380m tonne crop (last year 366m) although some analysts say higher prices would be needed to encourage that expansion.
Die-hard maize bulls were still hoping for some windfall Chinese orders for US maize to accrue from President Trump's broader trade deal, if it comes to pass, as now seems likely, although Chinese officials are reported to be trying to keep a diverse list of suppliers, country-wise.
Bearish sentiment was also fostered by ongoing export competition from Ukraine and South America, the latter getting ideal weather now for an expected huge crop recovery (after a drought cut production last year). That could affect competition well into the new season that starts on September 1 this year.
- Despite exporting over 50% more maize for the season to date, Ukraine still has a third more stocks of the grain than at this point last year. Some analysts think this season's fastest-growing supplier could cut plantings for 2019/20, one sees a 12% crop decline from this year's record near 36m tonnes – though that would still keep it in the major export league.
- The US has been banking on a second year running of larger exports (forecast around 63m tonnes versus the three-year average 51m tonnes from 2014-2017). But it will likely face more competition next season – bearish for prices.
- India, unusually, may need 1.5m tonnes of imports after a shortfall in its own crop.
- The EU corn crop could increase by about 4% this year according to French analyst Strategie Grains while Coceral thinks it will not change much. Three years of disappointing EU harvests, in tandem with tighter feed wheat supplies, have seen EU corn imports rocket to record levels this season. World corn trade is estimated to be growing by an above-trend 13m tonnes this season, led by EU demand - but will it need so much next season if its wheat crop recovers as expected?
- US maize ethanol production – which consumes over 44% of the world's biggest corn crop – has flattened out this season amid poor profit margins led by a frequently soft energy market.
- Brazilian analysts look for their crop around 91.5m tonnes compared with the USDA's last forecast of 94.5m but still well up on 2017/18's 82m. Argentina's crop is also seen in a 40.5/45m tonne range versus last year's 32m.
- Second largest corn consumer China's internal prices have been firming recently on tightening supply. It's expected to consume about 20m tonnes more than it produced this season but should be able to fill the gap from huge strategic stocks, rather than imports. China holds two-thirds of this season's estimated world surplus of some 310m tonnes.
Oilmeals - soya waits on US/China deal, Latam crops
Soya meal prices have had a fairly 'range-bound' couple of months as the cost of the raw material – soybeans – has pivoted both ways on a mix of bullish and bearish input. US traders were primed to respond as China started to resume purchases from this source under a trade truce agreed between President's Trump and Xi at the turn of the year. However, while this may accrue around 10m tonnes, it won't make up for all the beans China didn't buy in the past year of trade friction between the two. It means US seasonal exports in total, despite increased sales to some other markets, remain well down on the year - and well below normal. US farmers are still likely to respond by planting less this spring – yet the global market will likely remain in hefty surplus. But as detailed in our past reviews, the US and the world in total, have accumulated a vast soya stockpile from a series of good crops (even after last spring's Argentine drought losses), so supplies remain huge.
Brazil's record 120m-tonne 2018 crop is expected to be followed by another big one – maybe nothing like the 130m mooted at planting time but, if it gets to the forecast 113/115m, its second or third largest ever. More important, Argentina's crop is seen rebounding from 37.8m to 55m tonnes. The US as expected, has trimmed its final 2018 crop forecast by about 1.5m tonnes to 123.7m but that too remains a huge, record crop which, with the lower exports, leaves it with a projected record 25m tonne carryover, compared with around 5m to 10m normally.
China's imports are expected to drop this season for the first time in years, from a record 94.1m to 88m, according to the USDA. Chinese analysts think even that figure is too high, as this, the world's largest soya user, starts to diversify its protein ingredient sources and maybe feeds less soya meal due to outbreaks of African swine fever. The disease is already believed to have contributed to a 5% drop in consumption.
Brazilian soya exporters trying to get a head start on early-season sales are reported to be already feeling the pinch of renewed US competition and the later harvested Argentine crop is now not far behind. The USDA is looking for a steadier farm price next season as the crop contracts and CBOT futures suggest a 7% cost premium on March 2020 deliveries. That looks like wishful thinking. Without some major weather upset in the US growing season ahead, the current supply/demand outlook offers nothing to hoist soya costs appreciably. Even allowing for a 4.7% drop in US planted acreage, stocks may take years to clear.
Canada/Ukraine boost canola supplies, lower costs
Poised between last year's disappointing EU crop and apparently ample foreign supplies, rapeseed prices have decided to turn decisively 'South' in recent weeks. The Winnipeg market, representing top exporter Canada has fallen most steeply, reaching some of its cheapest levels for the past two seasons on reports of higher than expected old crop stocks, slower than expected exports (amid political tension with top buyer China) and constant pressure from sagging prices for soya, the trend-setter for meal value. The Canadian market was also depressed by ideas thawing US/Chinese soya trade could further stymie hopes of windfall sales of its canola and meal to China, the world's largest customer for rapeseed and oilseeds in total.
The European rape market has been following Winnipeg's collapse as well as mulling its own bearish input. The current season may portray tight European rapeseed supplies but demand for rapeseed oil – the primary crush product – has been weakened by price declines across the vegetable oil sector amid this season's record large supplies of soya and palm oil.
Canadian traders are keen to sell more canola to Europe which will likely respond favourably as more suppliers sign up for EU standard certification. EU crushers and oil users will also take advantage of larger Ukrainian supplies to help meet demand - which may be lower than earlier thought here too after the Commission recently had to allow in 1.5m tonnes of competing soya bio-diesel from Argentina.
- Ukraine exported a record 2.4m tonnes of rapeseed in 2018, 60% of it to Europe. Ukraine's last crop rose 25% to 2.75m tonnes, offsetting a smaller crop from Europe's third supplier Australia.
- China was expected to import 900,000 tonnes more rapeseed this season (+ almost 20%).
- Difficult planting weather and other factors have set the stage for an even smaller EU crop than last year's under 20m tonnes, maybe the worst in over a decade, now forecast 18/18.5m.
- Canada's 2019 canola area is expected to edge up to about 9.35m hectares from last year's 9.23m, keeping stocks there comfortable.