A glance at the long-term charts shows that, despite a recent rally off its 2019 lows, the world wheat price is still relatively cheap by historical comparison – let alone inflation weighting. In the past month, the world benchmark Chicago futures market was still trading only US $5.00/$5.35 per bushel – about $184-196 per tonne – having exceeded $9/bu (348/t) earlier this decade.

In 2016 it even got below $3.50/bu (about $130/t). The bearish backdrop behind this has been well documented in these and other columns – successive record global crops but a slower rise in consumption, building burdensome stocks.

The former Soviet Union has been the key player in this process. Russia went from largest importer to top supplier some years ago while Ukraine also got its modern farming act together to further inflate export competition, usually at heavily discounted prices. Yet the earlier top exporters, the US, EU, Canada, Australia and Argentina, have arguably still to complete their adjustment, some faring better than others.

Despite the surplus market, wheat prices keep trying to revalue upwards, with a little help in the past few weeks from several factors. These include rising Russian prices, droughts cutting crop potential in Australia and Argentina, dryness in Europe and the Black Sea region, some doubts about the percent of this season's world crop that will grade higher quality milling wheat and, not least, some spill-over strength in the feed sector from a firmer maize market.

Russia's crop actually still looks bigger than last year's (which fell almost 16% but was hardly a small one). However, it will likely be lower than expected earlier in the season and, for whatever reason, has not been undercutting the market as it usually does early in the marketing year (that began July 1) – so called 'front-loading' sales to grab the lion's share of business as rivals continue to bring in their own crops.

Some analysts have suggested this might mean a lack of adequate Russian quality for export and have accordingly trimmed their forecasts for this season's total sales from this source. However, plenty of others, including the USDA, still see Russian exports ending up fairly close to last year's 35m tonnes.

So, apart from a firmer early season price, the Russian changes from last year may look fairly moot. And in any event, any shortfall in supply from this source looks like being well outweighed by more wheat coming from neighbouring Ukraine, where its biggest wheat crop ever is seen enabling record exports of 19.5m tonnes (up 3.5m or almost 22% from last year).

Ukraine is already much further ahead than that with this season's export shipments (+49%), giving the bigger suppliers such as the US, EU etc a run for their money, effectively taking the place of Russia as the pacesetter.

Not that the EU isn't doing very well with its foreign sales this season. The USDA recently predicted it would raise exports from this year's bigger crop by 20% to some 28m tonnes. At the end of October, its seasonal shipments had already exceeded last year's by 50%. Things were looking very promising for exports as this column went to press with France starting to grab the lion's share of top importer Egypt's regular large tenders. Previous Egyptian business had been shared mainly by Ukraine, Rumania and France.

Despite the headwind of a strong dollar, the US isn't doing badly on foreign sales either. USDA had predicted its exports more or less steady with last year's 26m tonnes, maybe plus 1%. So far this season, they have run as much as 20% up although the gain has shrunk to 9% recently as the EU stepped in as one of the cheapest sellers.

Other factors influencing the bellwether US market include shrinking estimates for drought-hit Australia and Argentine crops. Australia could, for a second year running, see exports almost halve from their normal 16/22m tonnes. The National Australia Bank recently cut its crop estimate to just 15.5m tonnes compared with the last USDA forecast 18m and earlier estimates of a more normal 21m. Drought there still hasn't broken.

traders had been concerned that their soft wheat exports to Algeria (already taking less from the bloc this season) and others could be eroded by competition from Argentina. However, local analysts suggest that is less likely now as the Argentine crop drops to 17m tonnes or less from an earlier forecast of 20.5/21m.

Canada has a bigger crop this year which could make another large contribution to global wheat export trade - provided final harvests are not spoiled by wet/snowy weather.

Russia's crop estimates had been re-inflating over the past month from 70/72m tonnes to a range of 75.5/78m v last year's 72m. There was some concern about Russia's mainly winter-sown 2020 crop going in late under dry conditions, but sowing seemed to be catching up this month.

Prices also got a mild lift from trade chatter that China was showing interest in US wheat, having already bought some earlier this year. US exporters have been hoping the crop shortfall in regular Chinese supplier Australia might bring them some windfalls, especially if trade talks between Washington and Beijing come to some sort of preliminary conclusion in November, as markets expect.

Cold, damp weather holding up the last leg of US winter wheat planting also supported futures markets there as did the USDA reducing its spring and durum wheat crop estimates in November.

One conclusion that might be drawn from the wheat market's relatively robust performance in the face of overall weighty supplies is that, after so many years in the doldrums, traders might be re-evaluating this commodity. Time will tell. So far, forward futures are continuing to back relatively modest price gains going through 2020.

Interestingly, importers have recently seemed prepared to buy into a rising wheat market rather than risk further price increases – Algeria, Saudi Arabia, Egypt, Turkey and others all had to pay more recently than in previous tenders. US export prices for higher protein spring wheats – needed to build up flour quality - have also jumped recently by as much as 19% from their September lows, some reaching highest level since March. Ideas that some of the demand for this 'top-end' wheat might have to switch to hard red winter bread wheat firmed export quotes for this class too by about 9%.

It should also be noted that about half of the large global carryover stocks of wheat – and their main factor in stock accumulation – has been in China where these old reserves are of questionable quality. That may mean the 'record supply' actually contains more feed/lower grade wheat. Still, the EU crop is up, Ukraine's is believed to contain more milling wheat than last year, and the US is also carrying forward large old crop stocks of bread wheat.

Lower US maize supply meets less demand

Two factors have dominated maize market sentiment in recent weeks. On the bullish side, have been concerns that the dominant US crop is continuing to shrink after late planting, less than ideal weather during the growing season and rain-delayed harvests. But demanding price restraint, US exports, feed and ethanol use have all been disappointing. It suggests the US will see fairly limited domestic stock drawdown to meet demand (current forecast stocks minus 5.2m tonnes versus a crop decline of 19m).

Even that crop adjustment is far smaller than some analysts expected after the USDA in November found more acres and better yields than the average trade guess.

A smaller US crop is also offset by big supplies among export rivals in Latin America and Eastern Europe. Joint Brazilian/Argentine production this season is seen repeating last season's record result – around 150m tonnes versus the previous season's 114m, enabling exports of some 72m versus under 50m in 2017/18.

Ukraine is expected to produce 35.5m tonnes, about matching last year's record crop and 10m more than the average of the previous three seasons. The bulk will be exported. The Russian crop has meanwhile jumped from 11.4m to 14m tonnes, making a contribution to global exports.

The EU's own corn crop is seen similar to last year's 64m tonnes, but a bigger wheat crop will compete in feeds, reducing corn consumption and imports here significantly. This contraction in demand from the world's biggest customer for corn suggests more competition will develop among overseas suppliers for other markets in Asia and Latin America especially.

Factors that may affect maize costs ahead:

  • Traders question whether US exports that have recently run over 40% down on the year can actually reach the official forecast 50m tonnes – a reduction could lower US/global maize prices
  • Brazil's government has lowered its crop forecast to 98m tonnes versus the USDA's 101m, exports to 34m versus 38m. But official Brazilian crop estimates are often conservative
  • As this issue went to press, the US harvest was two-thirds in against 85% normally, some states only 15% binned. If the crop is trimmed in the final January estimate, it could firm prices
  • The USDA suggested US farmers could sow 94.5m acres next year versus this season's 89.9m (+5.1%), raise yields from this year's low 168.4 to 176.5 bu/acre and harvest a record 395m tonnes. Another private survey found 14% of respondents would raise planted corn area by at least 10%, some as much as 20% to compensate for this year's shortfall
  • Global corn stocks are into a three-year slide expected to knock 56m tonnes off their 206/17 peak. US stocks are projected at a four-year low which the USDA thinks could raise next season's average corn price
  • China's auctioning off of old reserve stocks has reduced them sharply over the past year. USDA recently estimated these contributed about two thirds of the global carryover. It could mean China reducing its targets to use more corn in bio-fuel – or relying more on imports for security of supply. The lion's share of China's 277m tonnes corn consumption is in animal feed – demand for which may be reduced African Swine Fever outbreaks reduced its pig herd
  • CBOT forward futures signal a 13.5% recovery in prices by this time next year.

Proteins: Plentiful soya keeps costs down

Soya meal is another commodity that remains relatively cheap in terms of the US dollars in which it is traded internationally. Despite some ups and downs in the interim, prices this November are remarkably close to those in same month for the preceding three years – a little dearer than in 2015 but that was an exceptionally cheap year after much higher prices before that.

Fortunately for consumers, the word is still abundantly supplied with soybeans, even after a steep cut in the 2019 US crop after various weather issues. That's just as well as soya will be relied on to contribute almost all the estimated 5m tonnes in this season's global oil meal consumption.

The latest (November) estimate for the US crop was higher than the trade expected at 96.6m tonnes and most of it is now in the silo. This is almost 24m tonnes lower than last year's but will be supplemented by about 25m tonnes carried in from the massive 2018 harvest (double the previous season's carryover).

As explained in past issues, the US surplus has been swollen not only by its own record crops (two years running) but by the loss of 10m tonnes of export trade amid President Trump's two-year tariff war with top soya importer China. Recent signs are that some sort of rapprochement is on the way – probably in the form of a preliminary trade pact to be signed between the two side before the year end. Nobody is counting any chickens yet, but China has begun to buy substantial quantities of US beans again as a 'goodwill' gesture and exports are already picking up.

If US soya trade to China does return to anything like normal, it will help stabilise the Chicago soya futures market, possibly firming prices of beans and products for a while. Yet this market will still be overhung by larger than usual supplies.

Latin American producers – who export 60% of world soybean and 75% of soya meal supplies are expected to produce another huge harvest in 2020, possibly 5m-to-7m more than this year's. On top of that, US farmers are expected to sow a larger acreage next spring to compensate for this year's crop losses. USDA recently suggested plantings could recover from 76.5m acres to 84m (versus 89.5m in 2017/18 and 87.6m last year). If yields reached an initially forecast 50.5 bu/acre (similar to 2018) the crop would turn out over 114m tonnes (+ about 20.9).

So, despite this year's US upset, production of soya meal (which still expanded sharply, even in the past season as Argentina recovered from a 2018 crop shortfall) looks like increasing yet again in 2019/20. Futures markets suggest that will minimise cost gains for soybeans in the coming year (to around 4%) although, as usual, that will depend on 'normal' weather in the interim.

Demand down for smaller rapeseed supply

Rapeseed prices have steadied up in recent months after a long slow drop, at first sight, counter-intuitive to the fundamentals of production shrinking to its lowest level in seven years.

Globally, the rapeseed crop is down from its peak of almost 75m tonnes in 2017/18 to about 68.5m – a drop of about 8.6% led by Europe (minus 5m tonnes), Canada and Australia (both down about 1.8m from two years ago).

Hefty carryover stocks are being drawn down to reduce the impact on crush while demand for the primary product, rapeseed oil, is down significantly, especially in the European bio-fuel sector, so less of the meal by-product is being produced.

However abundant, still relatively cheap supplies of market leader soya meal continue to beg restraint from prices rapeseed meal, especially as a much lower value product. And thanks to a political spat with its top customer China, Canada has lost its main export market and so accumulated huge surplus stocks – another factor capping prices.

Europe's tighter market for rapeseed has been running at a premium to Canada but the latter's GM canola is not so marketable here. Fortunately for consumers, plenty has been coming here from Ukraine's bumper harvest but supplies from that source may be starting to tail off while the other key exporter Australia has its second drought-reduced crop in a row so will be exporting less now.

While rapeseed is in deficit on paper, demand will likely shrink further to fit the supply, especially if the soya market stays down. Rapeseed will also have some competition from a bumper sunflower seed crop generating near record supplies of sunflower meal for a second year running.

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