Fickle weather raising input costs


Too much rain across the USA and too little – plus some very hot weather - in Australia, Canada, parts of Europe and the former USSR triggered a 'buy' stampede this month by speculators who earlier bet on prices constantly falling amid large stocks and more bumper harvests on the way.

On the bellwether USA futures markets, grain prices rocketed by about a third from their May nadirs, their steepest, fastest increase in some years. Analysts were talking of millions of unplanted and/or un-harvested maize acres and lower than average yields as the crop went into the ground record late.

traders too were getting worried about quality from rain-delayed US harvests and extra demand for this grain to fill potential deficits opening up in US maize supply. In recent years, US wheat feeding has only ranged between about 2.5m and 4m tonnes versus about 135m maize use in this sector but the jump in maize nonetheless raises wheat's intrinsic value.

Even still-glutted soybeans joined the bullish fray under threat of rain delays downsizing acreage and yields with plenty of that crop still to be sown in early July (when planting should normally be more or less over).

Until things dry out and fresh acreage surveys can be trusted, the maize and soya crops especially will be subject to a wide range of market 'guesstimates' and considerable revision right into the harvest period.

So too, to some extent, may wheat – though at this stage, the consensus seems to be that supplies of this grain are anything but tight. If the latest USDA update on global supply/demand is reliable, world wheat production will still jump by over 40m tonnes in the coming season to a new record 771.5m.

Since consumption growth is lagging that trend, stocks will climb too, by some 11m tonnes to a new peak of 286.5m. At this stage, USDA still expects big gains in production in Europe (+14m tonnes) and smaller increases in other major exporter countries including Canada (1.5m), Russia (+2.5m), Ukraine (+3.9m) – even Australia (+3.7m).

These increases are all a bit smaller than expected in June and the global equation could be less loose again if Australian, Canadian, Russian and some European wheat crops get trimmed further by the dryness and/or heat-waves that struck late June/early July.

However, with stocks of 275m being carried into the new season, that still wouldn't suggest a tight market for the 2019/20 season that started July 1st (June 1st in the USA).

Where there may be some questions is over the proportion of higher quality milling wheat. Canada and the US Northern States (spring-sown hard wheats) and Australia are all noted quality wheat suppliers. Along with rain-damaged US winter wheat and some possible heat damage to EU or Russian crops, we could see breadwheat/milling premiums over feedwheat rise to higher levels than usual – but that's by no means certain yet.

And on the plus side, sixth largest wheat exporter Argentina is expected to sow more than expected for its next crop in response to the rapid increase in world prices and good planting weather there.


Recent highlights

  • Before the price jump, CBOT prices as recently as late April had hit 15-month lows in the $4.20's-per-bushel area. By comparison, they spent much of the past four years trading mainly in a $4-$5/bu range, occasionally spiking out or dipping under. $4 was last pierced in Dec 2017 while 10-year lows under $3.60 were seen in summer 2016.
  • For several prior years, the range was $6-to-$9. Since then, consumption has tended to lag production increases, causing big stock build-ups while a broadening spread of suppliers have mostly had fairly normal weather in recent years. European markets have tended to follow the US trend but more gently, restrained by expected big crops, concerns about Black Sea competition and a strong euro
  • Recent wetter conditions in the EU, while rescuing some member states from drought, could have impacted proteins and other flour-making criteria. EU grain trade lobby Coceral lifted its forecast for the bloc's wheat crop to 140.3m tonnes (+12.9m on-year)
  • While USA wheat crops have started to show signs of deterioration, their general condition rating is still far better than at this time last year
  • Argentina's government raised its crop forecast to 22m tonnes – 2.5m over the USDA estimate
  • The Indian government has so far played down concerns about the strength of this year's late-starting Monsoon rains
  • Half the estimate world carryover stock of wheat is estimated in China, 'off-market,' much of it probably of dubious quality
  • World wheat import demand, after stagnating in 2017/18 and falling by 5m tonnes last season, is expected by the USDA to jump 8m tonnes in 2019/20. Despite a brisk start to the new marketing year, the USDA isn't expecting much US benefit from a trade recovery as Europe and others pick up more business with their bigger 2019 crops. US sales last season finished at 25.5m tonnes – up from 24.7m the previous year while actual shipments beat the USDA forecast. EU 2018/19 exports held up a bit better than expected last season and are predicted to rally by 10-12% in 2019/20.


Maize price hits five-year highs

USA corn futures' embarked on a stellar rally over the past two months on concerns that wet US planting weather would slash acreage and yields. The bull run appeared to have paused for breath in early July, however, after the USDA offered a higher than expected planted area forecast. But how reliable is that forecast at this early stage?

Several US analysts have suggested USDA may be under-estimating the number of foiled planted acres as well as potential abandonment of fields sown under difficult conditions.

Private estimates have been floated for area closer to 87m than the USDA's 91.7m, implying harvest acres far below the new 83.6m forecast. If yields also drop to 160 or less as some suggest, (versus USDA's 166), the crop could be under 340m tonnes (USDA had 352.4m in July).

It suggests US stocks will drop more in 2019/20 than the 30m tonnes USDA expects, possibly to their lowest since 2013/14. At that time, the world market for corn, dependent on the US as its largest export source, was around 950m tonnes. It has since expanded to 1.13bn.

The US share of the global maize export market is likely to drop significantly in the year ahead, not only due to the smaller domestic crop but amid larger, probably cheaper, competing supplies from Latin America, possibly Ukraine too.

At this stage, joint Brazilian/Argentine production is seen surging by 36m tonnes which (even allowing for their smaller starting stocks this year) could boost their exports by some 14m tonnes. Ukraine's crop forecasts have also been edging up after acreage exceeded target and weather was mostly favourable. Analysts have also been pencilling in a slightly larger EU crop.

Before the USDA came out with its more optimistic US planting forecast, the Chicago futures market for the grain hit its highest price since mid-2014 (when it briefly crossed $5/bushel). Some analysts think it may well go higher than that – perhaps to $5.50-plus in the months ahead.

The last time CBOT values rose this fast was back in mid-2015 when US and Brazilian crop declines led a fall in world maize production. 2019/20 is shaping up for another year of lower maize production having earlier been forecast to increase.


Recent highlights

  • Argentine corn exports have soared on its crop revival, aided further by its weak currency
  • Ethanol accounts for 44% of US corn use. Will demand from this sector hold up as margins on producing the green fuel are curbed by the steep rise in maize costs?
  • The USDA has trimmed earlier forecasts for a substantial rise in US maize feeding, now seen lower than last year's amid tight supplies and higher costs.
  • The EU is seen consuming 5.5m tonnes less maize in the coming season (81.5m), swapping that for its larger wheat supply and implying a smaller maize import need. Last season, the EU was the world's largest importer, taking 23.5m tonnes. Even so, maize is expected to pick up more import demand from other buyers, like second-largest buyer Mexico.


Soya & other oilmeals

Rain-delayed planting was also eroding US soybean crop forecasts in the past month, resulting in prices jumping by over 17% from multi-year lows reached in first half May. Prices had been under intense pressure from massive old crop stocks – the result of last year's record US harvest and President Trump's trade war with China blocking US access to this largest outlet.

The USDA's July planting estimate of just 80m acres surprised many analysts looking for a higher figure on the assumption unplanted maize land would be sown to soya instead, adding to the latter's already burdensome supply.

If the USDA is close, multiplying that by its last yield forecast of 48.5bu/acre, it suggests a crop around 104.7m tonnes (versus last year's 123.7m). But some analysts warn even lower acreage and yields could take that down into the low 90's which would wipe out most of the extra 17m tonnes the US had been forecast to take into the new season.

Total US supply could still cover its domestic and export demands, but it would no longer face such a massive stockpile (21.6m tonnes recently reduced from 28m) that USDA's own analysts had said would take years to erode. As with maize, for such a late planted crop, there is no reliable precedent to judge the outcome at this stage.

There is considerable uncertainty too about overall demand for soya. China has been reducing its soya meal consumption as an outbreak of African Swine Fever outbreak downsizes its hog herd, reducing imports from all its supplying countries.

Some analysts estimate up to 30% of Chinese pig output has been affected – 300m head, equal to a fifth of the global herd. It's possible that may be offset by consumers eating more poultry - another heavy soya meal consuming sector – or by more pork imports, raising soya meal consumption in supplier countries. US soya export body USSEC recently warned China may never resume US bean purchases at historical levels.


Recent highlights

  • Global 2019/20 soybean production is seen 16m tonnes down on the year but carry-in stocks start nearly 14m tonnes higher
  • USDA recently forecast slightly cheaper physical beans and meal next season while futures, say prices could rise by about 5% from their recent $8.80/bu. Apart from a brief foray below $8/bu at the turn of 2008/09, beans have managed to avoid going below that level since 2007 but traded sub-$6 the previous year)
  • Soya meal prices have been held in check by strong production - near record levels of US crush amid an expected huge resurgence in Argentina meal exports in the months ahead
  • China is seen cutting soybean imps by 5m to 85m tonnes this season. China dwarfs the next largest importer, the EU, which takes in about 18m
  • Last season, Brazil supplied half of world soybean exports, the US 38%. Argentina concentrates more on meal and oil exports where it is making a big comeback as it recovers from last year's crop-ravaging drought.


Rapeseed crop may be smaller

After touching multi-year lows at the start of May, top producer Canada's canola futures hit two-and-a-half-month highs in June as traders began to downsize the country's crop, prospects and traders responded to the firmer soya market.

Rapeseed is still relatively cheap because Canada has lost its biggest customer, China, resulting in a huge stock build-up that seems to have dissuaded farmers from seeding as much this year. Dry weather may also be influencing that decision as well as reducing yield prospects.

Although some rain was recently seen, the crop is off to a shaky start. Dry weather has also affected another important rapeseed exporter, Australia, expected to supply the lion's share (1.5m tonnes) of the USDA's forecast 2m tonnes global crop increase this year (now increasingly unlikely?)

EU crop monitoring body MARS recently raised its yield forecast for this crop but it's still seen somewhere between 500,000 and two million tonnes smaller than last year's 20m (which was itself over 2m down from 2017).

It suggests the EU will need to import more rapeseed to crush for oil (the primary crush incentive) in which case meal supplies should hold up. Fortunately for consumers, Ukraine expects to produce about 1m tonnes more rapeseed than last year while Russia could have its second big crop in a row, allowing more exports to West Europe from the Black Sea region.

World sunflowerseed production is forecast about 500,000 tonnes down on the year, but the crop will still be a relatively big one by past comparison, again thanks to large supplies from Ukraine and Russia.

Global oil meal production in total is forecast to increase by 2% to match demand, most of the increase - as usual – coming in the form of market leader soya meal. The abundant supply in that sector should help keep meal prices under control across the board.

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