By John Buckley


Wheat firm on Russian pullback, fund interest

Agricultural commodities have been drawing strong fund investment interest in the opening weeks of 2021 and despite its seemingly comfortable stock backdrop, wheat has been no exception. On the fundamental (supply/demand) side, additional support has come from Russia's attempts to curb its export trade through quotas, taxes, possibly increased use of red tape at customs too – at least until it has a clearer picture emerges of its own, so-far weather-challenged winter wheat crop. Analysts there had been warning that drought-stressed fields could face twice the normal amount of winterkill (frost damage), potentially taking almost 10 percent off the next harvest. The crop uncertainty has already driven up Russian internal and export prices, feeding inflation , and reduced its participation in some recent big tenders. So, what will Russia do next? seems to have risen to the top of the list of wheat market-making factors in recent weeks.

Two points need remembering in assessing Russia's influence. One is that only in the past half decade or so has this once major importer emerged as the leading exporter. Pre-2016, its contribution to the wheat trade (which has grown from the 130s to the 190 million tonnes), ranged from four million to 21.5m. That jumped to 27.8m or 15.2% in 2016/17) and in the following season reached a (so-far unequalled) record 41.5m tonnes (22.5%). Along with similar growth in Ukrainian exports (from 4m to a record 21m last season) this has not surprisingly coincided with a smaller export market share for one-time leading supplier, the USA and strong competition for other countries too – arguably the main factor in a long period (five years) of cheap wheat.

During that period, the bellwether CBOT futures price often traded at half the peak levels of the 2010-2015 period - sometimes under four/bushel). While welcomed by consumers, this has been a constant problem for farmers, frequently keeping plantings down. Nowhere was that more noticeable than in the US itself, where the sown area last year reached its lowest in at least one hundred years, possibly ever. So, bottom-line, Russia's expected exports of 39m tonnes in the current season that ends June 30, can hardly be seen as cataclysmic. It's still higher than the 35.2m of the previous two seasons.

The possibly disproportionate response from wheat prices reflects:

  • A coinciding decline in Ukrainian export availability (about 3.5m less than last season's 21m record).
  • Recent worries about US winter wheat crops being hit by drought (probably now easing in some areas at least but in the face of new risks from severe cold weather).
  • Last year's lower than expected EU wheat crop (which is expected to reduce exports by about 12.5m tonnes or one third).
  • Drought reducing Argentina's crop
  • These factors have to be respected in the global mix of supply. But so have this season's larger Australian and Canadian crops (in total plus 17.5m tonnes), helping world total production reach a record 773m tonnes – still more than this season's estimated consumption needs - and world carryover stocks building to am all-time record 304m tonnes (over a third more than the average for the five years prior to 2015).
  • But it does Russia's exporters no harm at this stage of the season to watch the price they're getting on the world market rise on each bullish pronouncement about their quotas and levies. For one season, their government's caution probably won't much dent Russia's ambition to portray itself (as the US has long done) as a reliable supplier. A 17.5m tonne quota was proposed for second half 2020/21 (Feb/Jun) and an approximate US$60/tonne export levy. However, Russia has since said it plans to extend the controls with a new formula-based tax into next season and thereafter, probably based on 70 percent of the difference between the wheat price and US$200/tonne.
  • The bottom line is that, if Russia's pullback is now the main driver of firm prices and fund interest in wheat, the market probably won't get much firmer – or stay that high for long. Still this has all been a useful reminder that wheat has probably been too cheap – undervalued at times during the past five or six years. If wheat can find its equilibrium around the middle of the recent price range, it may help ensure farmers keep planting and supply does not run short.
  • The CBOT futures front month finished 2020 at six-year-plus highs of US$6.41½/bu – up almost 15 percent on the year and in early 2021 saw another push to the US$6.90s from which it has recently retreated to the US$6.30s. But even if wheat is in danger of getting a little overbought, it may still be able to count on 'outside' support from firm maize and soya markets, raising value in feeds as well as exciting further 'outside' investor (fund) enthusiasm for agric commodities in general. A weak dollar may also contribute to firmer prices, helping to soften the impact on importers' ability to pay up, world prices tending to be mainly quoted in the US currency.
  • Prices might have held firmer if not for much needed moisture for large parts of the previously parched US winter wheat belt, where crops have been sown on a larger area and condition ratings recently improved. However, ongoing dryness in the high quality spring and durum wheat areas of Northern States needs to be watched. Hopefully the crop will also escape a recent 'winterkill' threat.
  • Sixth largest exporter Ukraine's winter crops were reported in mostly good condition.
  • An Argentine port strike, chiefly affecting soya exports, recently added fuel to the wheat fire but the effect was was expected to recede after this was settled.
  • European traders have been hoping to cash in on shortfalls in Black Sea exports. The bloc's second largest exporter Germany has been particularly active, filling in gaps left by top supplier France's smaller 2020 crop. But French sales have been strong too in first half 2020/21, soaring to China and keeping their usual strong hold on North Africa, within the limits of this yuear's smaller French/EU crops. The bloc's total soft wheat exports to non-EU countries are still running over 20 percent lower than year's but Grain trader lobby Coceral expects a strong, near 12 percent rebound in next year's EU main soft wheat crop, assuming normal weather.
  • Official body Abares has Australia's crop at 31.17m and some local analysts as much as 32m versus the USDA's recent 30m tonnes. Unusually, Australia has been selling export wheat cheaper than Russia. Canada also boosted its crop estimate to a seven-year high 35.2m.
  • US wheat export sales had been as much as 13 percent up on last year's at this point versus USDA's forecast of a mere two percent seasonal gain – but the lead dropped to four percent recently. The main gain has been to China, taking nine times as much US wheat as at this time last year and, unusually, expected to remain a key customer.
  • Chicago futures have next summer's prices slightly cheaper than now and no rises all the way through to July 2022. EU milling wheat futures – recently at their own six-year highs – are also seen cheaper next year.

Maize prices at 6½-year highs

Back in the late spring of 2019, Chicago maize futures were just over US$3/bushel. In the past month they have crossed US$5 for the first time in over six years and recently traded into the US$5.70s . The US – and to some extent, the global maize market – has been responding to a dry weather threat to Latin American crops and a backdrop of global stocks at their lowest for several years. This season's forecast total carryover of 289m tonnes sounds a lot but is 18 percent or 63m tonnes down in just four years - and two-thirds of it is off-market in China, much of that probably of questionable quality too.

The maize market within China (the world's second largest consumer) is in tight supply and constantly in need of stock releases from its strategic reserves. So China has turned to the US to buy huge quantities – initially to fulfil a reciprocal trade pact signed with President Trump over a year ago, and latterly attempting to stop record prices for its domestic consumers getting any higher.

Brazil and Argentina have had some rain relief in recent weeks and are still forecast to harvest a record 110m and 49m tonnes respectively (versus last year's 102m and 51m). So no supply crisis appears to be looming here – assuming they get more follow-up rains. Harvests are mostly from first quarter 2021 onward.

Traders have also been building in fourth largest exporter Ukraine's smaller 2019 crop and third-largest Argentina recently imposing a temporary sales curb amid its own crop weather risks and government attempts to control domestic inflation.

The reduced pressure from some of its rivals has seen the US enjoy a maize sales bonanza so far this season, especially with all the new China business. So far it has sold the now top importer 17.7m tonnes against next to nothing this time last year. Some analysts think China could eventually need as much as 30m tonnes of imports (from all sources), having kept dependence down in the past with if a quota over which stiff duties apply. The China boom has helped to US to an export renaissance, its total sales for the season to date now expected to reach 65m tonnes compared with the average 48m of the previous two years, that recovery also benefiting from reduced competition from Ukraine and Argentina.

Former top importer the EU's corn imports are still running 27 percent down on the year, well below the USDA's forecast of 17 percent drop. But against that, main EU supplier Ukraine has a smaller supply to dispose of this season. The US has also sold a lot more this season to other importers like Japan, Taiwan, Korea, Mexico and several Latin American customers. Consumption is seen growing, not only in China and the South American producer countries but for many smaller/moderate-sized importers too.

Analysts were also speculating new US President Biden may give some fresh stimulus to an ethanol industry that was hit hard by covid's curbs on transport fuel use. Ethanol is expected to account for 41.5 percent of US consumption, almost as much as the animal feed sector this season. Amid improved energy markets, US ethanol production has been recovering recently towards pre-covid levels but stocks have been edging up too.

Attention is also turning now to how much US farmers can expand sowings in a year when rocketing soya prices have out-performed the coarse grain (and CBOT futures have maize seven to eight percent cheaper next season). The US arguably needs a bigger maize crop with its carryover stocks for this season expected to drop for a second year running, possibly to their lowest since 2013/14.

Stock decline continues to fuel strong soya

Soybeans are facing their tightest stocks, in the US and globally, for several years along with dry weather threats to Latin American crops – the latter now accounting for over half the world's supply. Since the last US season ended with a smaller than expected crop, the bellwether CBOT futures market has responded with a 63 percent price surge to over US$14/bushel (about US$515/tonne) - its highest in over six years. The speed and strength of that price rise has also owed much to the US recapturing exports it lost to top market China last year due to trade disputes that erupted under the Trump administration. Add to that Brazil overselling its last crop to China and others and now running short of stocks in the period before the next one. The final straw was a port strike in largest soya meal exporter Argentina which turned more global demand to the US.

Soya consumers' hopes that rains would be timely and adequate enough to rescue Lat-Am crops appeared to be answered as we went to press. US farmers are meanwhile expected to respond to these attractive prices with a huge five to seven million acre increase in their planted area this spring. If weather plays along, that could mean a giant 125m tonne crop – so the picture might look considerably looser in six to nine months' time (as slightly cheaper forward futures markets suggest).

As things stand at time of going to press, Brazilian crop estimates are around 133/134m tonnes versus last year's 126m record high. Argentina's crop forecast is around 48/49m, the same as last year's.

For this season, ending August 31, world soya meal production is forecast at 253m tonnes against last year's 243m and the previous two seasons' 234m tonnes. This should be adequate to meet foreseen demand growth, the bulk of which, as usual will be inside the largest user, China.

That said, US stocks of soybeans are expected to plummet on the rise in exports to China and are currently forecast to end the season at just 3.2m tonnes – their lowest for many years (compared with 14.3m last season and 24.7m in 2018/19. This is a precariously small cushion, should anything go wrong with US planting/growing weather in the Apr/Sep period. The US Department of Agriculture is factoring in the tighter stocks (but not all the crop risk?) with average domestic price forecasts for 2021/22 of US$11.15/bu for beans (last year US$8.57) and US$400/short ton for meal (US$299.50).

the demand side, China should remain a strong market for meal as it expands poultry flocks and recovers pig herds hit last year by African swine fever. Europe, Brazil and Argentina are also using a bit more. US crushers have meanwhile been buying further forward than usual to ensure their supplies as carryover stock estimates shrink. Traders fear a slow start to Brazilian arrivals (late planting and rain-delayed harvests) may keep demand focused on the US for longer than expected, noting Brazil's January and February exports were expected to only a fraction of last year's. But the rains are also helping later-sown crops in both Brazil and Argentina. But until the Lat-Am crops are in the bins and the USA's up and growing normally, we can probably expect soya prices to stay firmer than usual for many months ahead.

Rapeseed supply squeeze intensifying?

After rising by a third in 2020, the bellwether Canadian futures market for rapeseed/canola hit yet more 13-year highs in the opening months of 2021, well in excess of C$700/tonne amid signs of even tighter than expected supplies. Canadian government body AAFC's 2021 crop estimates – planting plus three percent, yield +2.7 percent and production plus-six percent at some 19.9m tonnes have not suppressed bulish sentiment as the 2020/21 season there is still likely to end in July with very tight stocks - just 1.2m tonnes, making a 5 percent stock/use ratio (versus last year's 3.13m tonnes). That could dwindle even more if, as some analysts think, officials have under-estimated old crop crush and exports. AAFC has also raised its 2020 annual average Canadian price estimate to C$635, although it sees that dipping back closer to C$600 this year if the crop expands. EU prices have risen sharply, dragged up by the Canadian market and tight supplies here. There is no sign yet of consumers reducing consumption in the face of these high costs so salvation may depend on Canada raising planted area even more, the main potential swing factor as West and East Europe's mostly autumn-sown crops are already in the ground.

World rapeseed production fell for a third year running in 2020/21 to five-year low but crush for strong oil demand has held up, drawing down global carryover stocks of the oilseed. These had been as 9.7m tonnes after harvests reached a record 75m tonnes in 2017 but could hit a 13-year low 5m by the end of the current season, main declines expected in Canada and Europe. Rationing is demanded – but at what price will that click in? Much will depend on how the dominant soya meal market shapes up.

  • The French farm ministry estimates winter sowings for 2021 were on a slightly smaller area after some dry weather during planting. However, EU grain lobby Coceral saw potential for a rebound to the bloc's (plus UK) next crop to 17.8m from 2020's poor 16.9m tonnes. Even then, in the wake of Ukrainian planting shortfalls for 2021 crop, the fundamentals remain snug.
  • China has been taking in more Canadian rapeseed, intake plus 88 percent on year at 716,400 tonnes to end October. Trade had been slashed over the previous season by a political spat.
  • Due to unfavourable weather. Ukraine was not expected to sow all its planned 2021 crop area, the final number seen under 1m hectares versus last year's 1.35m according to UkrAgroConsult.
  • Canada's canola crush has been running at highest monthly levels ever, over 900,000 tonnes while exports have outperformed forecast – up 50 percent on the year. Seasonal offtake could be up as much as 1m tonnes from a smaller crop.
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