by John Buckley


Dearer wheat still good value?

Crop upsets effectively came to the rescue of ailing wheat prices in the recently-ended calendar year, raising costs for consumers, but arguably helping to stall farmer sowing cuts that could risk less secure supplies down the road.

Steep declines in Russian, Australian and European production and a drop in Ukraine"s crop, took 30m tonnes, or 4.5 percent, off world output and boosted value on the bellwether CBOT futures market by about 18 percent over the year. Paris milling wheat futures put in an even stronger performance, closing about 28 percet up.

The relative restraint in the US was partly explained by it carrying much larger leftover stocks from the previous season (enough to cover its own annual consumption or export needs even before the next harvest!) Alongside an 8 percent crop increase in last year"s US crop, and amid sluggish exports, this has kept US supplies at comfortable levels.

Underlining that, it should finish the current season with still high stocks of some 26.5m tonnes – perhaps even more if a much vaunted recovery in exports in the second half of this season fails to match predictions (our current view is that it could come close). The same might apply to Europe too, as its currently forecast ending stock of 11m tonnes (down three million on the year) also depends on its severely lagging exports improving closer to last year"s (already low) 23m tonnes.

Regardless of plentiful US supply, North American and European futures - and the international market for physical grain - have had no choice but to rise with the strong price trend from what has traditionally been the cheap end of the market – Russia and Ukraine. Russian prices for 12.5 percent protein bread wheat were recently reported to be trading as high as US $250 per tonne compared with $194 back in January – more even than, traditionally far dearer, quality Germany wheat.

It means the Russians have done quite well income-wise, even in their year of lower exports (currently seen falling by about 12% from the previous season"s record levels), especially when taking account of a weaker rouble, raising suppliers" returns in local currency from the dollar-quoted world market.

As well as these "Black Sea" origins, the Australian wheat market has also been firm in latter 2018, fuelled by a drought that not only slashed the crop but boosted domestic feed demand in the dry east of the country, where livestock lost their pasture.

Argentine wheat, at one stage, looked like taking up the mantle of cheap export contender on the back of a larger crop. However, that origin too has suffered weather problems recently, excessive rain hurting quality, pushing up the price and disrupting attempts to work into import markets normally dominated by Europe (especially France in Algeria).

While on paper, there seems more than enough wheat to go around (ending stocks forecast at 268m tonnes will hardly be low, by historical comparison), a large chunk remains unavailable to the market in China - estimated to hold well over half the forecast 2018/19 global carryover of some 268m tonnes. That equals about 36 percent of annual wheat consumption. But, take China out of the equation and the stock/use ratio drops below 26 percent (though again, this is not a tight number historically).

Where are wheat prices likely to go in 2019? Will there be a return on the CBOT market to last August"s peaks in the $5.70s or the EU futures summer highs of almost €220/tonne? Recently, both markets have traded well off those. However, forward futures suggest CBOT can rise by about eight percent over the year to March 2020 (around $5.65/5.70) while Paris quotes distant positions about six percent cheaper. That mixed bag makes 2019 a difficult guess.

The US market is currently watching two key factors – hoping for a domestic export recovery and trade talk that domestic winter wheat acreage may be lower than expected, after some autumn sowing disruption from bad weather. US exports have been forecast by the USDA to increase by almost 26 percent this season, or by 6m-to-29m tonnes.

Things got off to a slow start. By October, the strong early-season pace of Russian exports had pushed the US 25 percent under what it achieved this time last year. By December, the gap had narrowed to just 10 percent, but recently it widened out again to 12 percent. The main decline in US sales has been to African countries, especially Algeria and Nigeria.

However, recent relative restraint in US wheat prices has helped sustain trade hopes that exports can again start to catch up in the final months of the season (ends May 31 in the US) as Russian competition pulls back amid tightening supplies of its export quality bread wheat. This is already forcing shippers to go deeper into Russia"s vast interior for fresh supplies, sharply raising transport costs. Reports of railcar shortages to move the grain are also making exporters and their customers wary of booking new Russian orders.

For the full season, the USDA predicts Russian shipments will drop by about five million tonnes to 36.5m. Traders have been cautious about embracing Russian pullback talk too quickly, given a history of sales from the top exporter often exceeding expectations However, this year may be different. With its ending stocks expected to slide to a three-year low, the government needs to safeguard adequate supplies at affordable prices for its domestic consumers. That may not mean direct curbs on sales but could result in "administrative" measures to slow exports, like increasing checks on cargoes.

US winter wheat sowings were earlier estimated by the USDA to have covered an area of 32.53m acres. That was due for revision in January, but thanks to a partial government shutdown over President Trump"s disputed Mexican Wall funding, this report, along with much other key January data, was delayed indefinitely.

Analysts suggested the figure should be trimmed back to about between 31.7m and 32.3m after bad weather delayed plantings in some areas. The lower estimate would be down 2.7percent on the year. So far, the crop is not reported to have suffered significant frost damage and with drought areas shrinking this year, yield prospects may be good. Spring wheat sowings were also due to be estimated soon. The US grew a bigger spring crop last year and could plant more to capitalise on perceived tighter supplies of this and other high-quality wheat on the world market. So could Canada, where farmers are seeing relatively better returns from wheat versus canola, its main rival for crop land.

The US and Canada were the only major exporters to get significantly larger harvests this season, the latter"s crop recently up-rated by its government to 31.8m tonnes – about six percent better than in 2017 and promising larger exports from this source at least.

  • Russia"s current crop is estimated to have dropped by 13-15m tonnes from the previous year"s record 85m but is still one of its biggest while the official export forecast of 37m tonnes would be its second best. About two-thirds of it has already been sold. Strong Russian into year-end and a smaller domestic crop were the main factors reducing EU seasonal exports by 27 perent versus same period last year
  • The French farm ministry estimated a 3.5 percent increase in its winter wheat area, while French analyst Strategie Grains estimated the total EU crop area could expand six percent, to 24.7m hectares
  • The EU wheat market has been restrained by heavy maize imports, competing in the feedgrain sector, helping wheat consumption fall by three million tonnes, or 3.8 percent this season
  • World wheat consumption grew by 40m tonnes from 2014 to 2017 but is thought to be stagnating in 2018/19. Growth in world trade soared by 20m tonnes in the two years prior to 2017/18, probably influenced partly by lower prices during much of that period. Last season, trade growth was flat and this season it is thought to have gone into reverse by four million tonnes or two percent - taking demand pressure off prices
  • Australia"s crop shortfall will help reduce competition among exporters - a maximum 17m-tonne harvest pointing to exports at a 10-year low of around 10.5m tonnes
  • Early pointers to a bigger Indian crop could mean exports resuming from this supplier this year
  • The US recently sold wheat to top importer Egypt for the first time since early 2018, competing against dominant suppliers Russia, Ukraine and Romania. However, as well as its higher freight costs, US sales may be challenged by a strong dollar, adding to importers" landed cargo costs. US sellers will also have to resist joining in too quickly when futures get frisky.


Competitive export market should restrain maize costs

World demand for maize is relatively strong this season. Consumption is seen rising by 45m tonnes and imports by 12m to a new record 163m tonnes. Consumption growth is led by China (+13m), the US (+6m) and a number of Asian and Latin American countries. European corn use is also growing, showing an above-trend increase of some 6.5m tonnes, displacing wheat from animal feeds. It makes the EU the largest growth component in this season"s imports (+3m-4m tonnes).

Fortunately for the EU and other consumers, exportable supplies are expanding too. In the first half of this season, importer reliance has been heavy on Ukraine where a record 35m-tonne crop has added about 11m tonnes to its export potential. Ukraine has taken full advantage of the expanding EU supply deficit, reducing shares supplied to this market by competing exporters like Brazil.

Ukraine has also helped fill a huge 25.5m tonne shortfall in South American production last spring. And not least, import markets have been well-fed by US corn which, after another decent crop last summer, has recaptured a lot of the trade it lost to the Latin-American suppliers (and Ukraine), earlier in the decade.

Maize values on the bellwether US futures market have seen a smaller rise than wheat, about 14 percent over last year after shedding bigger gains seen in the late spring, when Latin-American crop fears were at their height.

Recent price restraint has largely reflected the bigger than expected Ukrainian crop and ideas that South American harvests will make a huge comeback over coming months. At the turn of the calendar year, the USDA was estimating a 23m-tonne regional increase although recent hot, dry weather in Brazil and some flooding problems in Argentina suggest that might, now, be a little optimistic. Latin-American supply growth will also be offset somewhat by tighter starting stocks, about eight million tonnes lower than last year"s.

The markets are also expecting the US to plant more maize this spring in place of soybeans – though how these two commodities will carve up their land shares is a matter for much debate, dependent on (a) how much lost US trade comes back from former top customer China (see oilmeal sector below) and (b) price relationships between the two at planting time. US farmers and their customers may have too many soybeans piling up in stocks but the maize market is hardly short of supplies either.

January was an odd month for the US markets, especially maize and soya, as the partial US government shutdown robbed analysts of a wealth of data due from the Agriculture Department. That included final estimates for both crops (currently expected a bit lower than previous forecasts); the US quarterly stock reports – from which the trade calculates grain and oilseed usage; US planting estimates; and not least, monthly World Agricultural Supply/Demand Reports (WASDE).

If that were not enough of an information famine, markets also had to get by without usual twice-weekly summaries of US export sales, as well as daily reporting of any large trades, leaving them dependent on whatever commercial traders and analysts were prepared to reveal (or guess). The futures markets currently suggest maize will cost about eight percent more this time next year, soya about six percent more.

  • China will step up attempts to reduce its vast corn security stocks, much of them old, of dubious quality, but presumably useful for plans to expand bio-ethanol production. China holds two-thirds of this season"s estimated world maize stock of some 309m tonnes
  • US markets have also been watching ethanol – an important sector accounting for 44.5 percent of US domestic maize consumption. Production has been constrained by weak energy markets and firmer corn costs cutting profit-margins, so could be due for a downward revision when the USDA data comes back on tap. Or maybe China could, as some analysts expect, import more from the US. The latter is also due to use more in ethanol if year-round "E15" - a higher corn ethanol blend is approved
  • US final crop figures - Private analysts have been trimming their estimates to around 365/369m tonnes, compared with the USDA"s last forecast of 371.5m on slightly lower harvest area and yield numbers. It"s not enough to significantly change the supply/demand balance within the US itself
  • Bigger Brazilian and Argentine cropswill eventually weigh on corn values globally
  • Ukraine"s seasonal exports are 67 percent higher than last year"s. With another 18/20m still to come and bigger South American crops around the corner, US traders might be challenged to export 62m tonnes as the USDA forecasts (not far off last year"s higher-than-usual number). However, some Ukrainian officials have been forecasting a smaller crop this year as yields retreat to more normal levels (early estimates around 27m – down 8.5m tonnes)
  • Europeanfarmers had bad luck with the weather in recent seasons. More normal conditions could take some of the upward pressure off this market, especially if wheat production rebounds too, as currently seems possible. That would suggest reduced EU maize imports, with implications for the world market/export values. Overall, strong global growth in world maize imports has been testimony to the relatively good value it has presented in recent years.


Oilmeal prices rally on Latin-American soya crop problems, China buying

Oilseed meal costs have been rising in the past two months, as weather issues forced analysts to scale back their South American soya crop forecasts while top buyer China returned to buy US supplies for the first time in many months.

Chicago soya futures have responded with a near 10 percent increase from their November lows, lending a firmer tone across the oilmeal complex. Sentiment has also been stiffened by constant reminders of a tighter EU rapeseed market, following last year"s crop shortfalls – and the likelihood that things won"t get much looser in the next season that starts later this summer. More about rapeseed in our next review.

Soya is by no means tight, nor likely to become so under any of the current scenarios. Brazil"s crop – which late last year looked capable of soaring to 130m tonnes or more, is now widely seen closer to 115/120m – but that"s still a massive crop compared to the ten-year average.

Argentina"s outlook may not quite get to the earlier forecast 55/55.5m tonnes but will still be way above last year"s drought-depleted 37.8m. First Latin-American harvests have started so these crops will be making their mark in the weeks ahead. On top of that, the US still has to find a home for more of the surplus soya accruing from last year"s record 125m tonne crop. China is finally giving it some help. Having imported a fraction of the US beans it took last year, amid the trade dispute between the two countries, it has recently bought some 3m-to-5m tonnes and may take as much as nine millon if "truce" talks with the US continue to go well later this month. But that will still leave the US with a surplus headache.

The last USDA forecast was for record ending stocks of 26m tonnes - more than double last year"s already large level and versus an average 6m tonnes in the previous three years. As bigger Latin-American supplies flow, the CBOT market could come under renewed downward price pressure, weighing on the oilmeal complex as a whole.

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