by John Buckley

 

Wheat price bends under ample supply, virus fears

The opening months of 2020 have been a volatile period for global wheat markets, marked by some big swings on bellwether CBOT and Paris futures exchanges as well as the physical export markets. The steep price gains noted in our last review were extended initially, nudging 4½ year highs in Chicago amid Southern Hemisphere crop issues, delayed European and US sowings and the latter's smallest winter crop area on records going back over 100 years. Plenty of demand from importers large and small – even at the higher global export prices – added to market strength along with signs that top supplier Russia might start to curb its exports for the remainder of the July/June 2019/20 season.

But it didn't last and as we go to press, the CBOT market has shed almost 10% of its January peak value to hit 2½ month lows while European and Russian prices have embarked on a fresh slide too. Even though there has been talk of one-time key exporter Australia running out of supplies much earlier than usual (thanks in part to its strong sales to China), markets now seem to be taking a much more relaxed view of the overall supply outlook.

Several factors have weighed in on the bear side for wheat. Russia and Ukraine have had an unusually mild winter and may emerge from dormancy with crops in good condition amid adequate moisture. A yield bonus may compensate for Ukraine's smaller sown area – and this important supplier still has plenty of grain to export. Russia, which has recently up-rated its 2019 crop estimate may also be inclined now, if the crop weather stays benign - to take a less protective view of its own remaining exportable supply.

European crops, while making mixed progress among the member states, seem to doing a bit better than thought earlier in the winter and exports from the bloc remain far ahead of last year's – again with a lot more left to sell yet. The US crop also saw its condition rating improved significantly during February. It too has managed to export more this season but will hardly finish the marketing year with tight stocks (apart possibly from soft red winter wheat, which continues to out-price normally more valuable hard red winter breadwheat).

As well as the large global stocks that will be carried into the new season in July, the International Grains Council recently estimated world planted area for wheat would be up for the 2020/21 crop by about 2%, paving the way for a possible record crop, not far off the 770m tonne mark. This season's crop was recently estimated by the USDA at an all-time high 764m - up 32.5m from the previous (2018/19) harvest.

Many months of unknown late-winter, spring and summer growing weather lie ahead before 2020 crop bounty can be proved but the currently promising outlook offers little at this stage to jolt the futures' market view that prices will be no more than 5% or so higher in the autumn – if that.

On the demand side, wheat prices have been further undermined by the general downdraft in commodity and equity markets from the threat of China's coronavirus crises turning pandemic. Potential disruption to movement of goods is only one of the more obvious risks. With financial pundits bracing for a possibly substantial hit to the global economy, questions must also be raised about many developing countries' ability to finance the commodity imports they depend on. We have already seen a massive hit to the energy sector (and not just through lost demand from top importer China) reflected in crude oil prices slumping to their lowest in over a year – and these may have much further to fall yet.

That casts a pall over the bio-energy sector, not least corn ethanol upon which the US depends for about 45% of its annual maize crop disposal. Maize is also being hammered by fears that global economic stagnation could crimp the demand for meat, growth of which has traditionally been closely linked to consumer spending power.

Where maize prices go, wheat must follow to some extent as a rival animal feed ingredient, albeit one far more dependent for its demand on human food offtake. As one pundit put it last month, 'people will still need to eat, and wheat remains the world's leading food grain.'

there seems no real direct threat to wheat consumption commodity markets en masse appear to have had little choice but to jointly react to the sheer uncertainty thrown at them by this (in scale at least) unprecedented 'putside' factor. Hopefully, enough may be clarified about the coronavirus spread for things to settle in the coming weeks and months but, in the meantime (and especially if they're not) grain prices seem likely to experience more volatility across the board.

Key wheat factors going forward

  • Russian analysts this month estimate their next wheat crop could rise to 83/87m tonnes from last year's (recent upward revised 74.4m) and Ukraine's to 26/28m (29m tonnes). Russian export prices, after a long period going up, recently dropped sharply with slower exports and are now seen competitive on world markets. That could be a bearish pointer in coming weeks
  • After a brisk couple of months, import demand for wheat slowed in late February, possibly to see how far the slump in prices might go
  • Will managed funds, recently sellers on the US futures market, turn buyers if low prices appear to offer a lower-risk investment?
  • Europe's wheat market has been under downward pressure from the US/Russian price trend, offset by EU exports so far running 64% higher than last year's (versus USDA forecasts of a 35-40% increase). US export sales are also up but lagging the official forecast amid EU and 'Black Sea' regional competition
  • Canada is still selling its 2019 wheat crop but has faced problems transporting and loading amid blockades from environmentalists protesting over a new oil pipeline. It's mainly spring planted crop is yet to be sown under shifting price ration between wheat and main rival canola
  • Australia's crop estimate has continued to shrink amid record drought and heatwaves to a 12-year low of 15.2m tonnes and its exports may run out faster than usual
  • Some low estimates have been circulating recently for Europe's 2020 crops including France minus 4.7m tonnes on the year and the UK down 5.6m. EU grain lobby Coceral forecast a 5.4% total decline to around 148m tonnes from last year's which was up 17m to a four-year high 154m. EU prices were supported by the euro recently trading near three-year lows versus the US $, helping export sales
  • The world's largest wheat consumer, China, was recently reported to be boosting use, pushing prices to record highs on its own futures market, requiring extra imports from Australia, France and others
  • US ending stocks are seen falling to a five-year low but not yet tight 25.6m tonnes – though the soft winter wheat component (basis of CBOT futures) will be unusually small. SRW export prices were recently some of their most expensive since 2014/15, supportive for overseas soft wheat producer prices
  • France has had a stellar export season to date but recently faced disruption from transport strikes. Germany, also with busy order books but a good crop, stands ready to fill any gaps
  • Ocean freight has been unusually cheap recently amid the collapse of Chinese demand for a whole raft of commodities. This may help contain importer costs amid US $ strength.

US crop rebound outlook weighs on maize

Despite last year's unusual decline in US maize production – and a consequent 11m tonne slide in world output for the full season – consumers have not run short of the leading coarse grain, nor had to pay exorbitant prices to get all they need. True, there was a summer spike in costs (up almost one third on CBOT futures at one point) when the US crop suffered almost unprecedented planting delays from excessive rains.

But it didn't last long as consumers turned instead to ample South American and Ukrainian supplies and drew upon adequate US stocks. Moreover, world demand had levelled off with a pause in usage for ethanol and feed demand amid some shifting in the latter sector over to ample feed wheat supplies. Also, the US crop, while down, was no catastrophe, still one of its biggest ever, despite a decline in yields from late planted fields.

As the US gears up for its annual spring planting campaign, how much farmers there will plant emerges as a key issue for prices going forward. At this stage, there seems almost universal expectation that acreage will shoot up, not in response to any bull market but to compensate for last year's lost production. Recent forecasts from USDA economists and others suggest an extra 5% to 7% will be down, putting the US on course, normal weather permitting, for a jump of some 40m to 45m tonnes in 2020 production and a resurgence in carryover stocks from under 50m to perhaps 65m or 70m tonnes – which would be the most since 1988.

Does the US need a crop of this size amid the prospective domestic and export demand and the current competition from other supplying countries? The potentially price-depressing stock growth scenario (shared by USDA among others) suggests farmers could be over-reacting to the 2019 weather problems.

Down south, Brazil and Argentina are again expecting huge crops – a combined 150m plus tonnes versus the three-year average (priorto 2018/19) of 117m tonnes. Ukraine, which has moved to the fore with Brazil as chief US rival, will also likely continue to produce a large export supply. Its crops have been averaging 35m tonnes against 25m normally.

 

Maize factors going forward

  • They are led by the final outcome of Brazilian and Argentine harvests from spring forward. So far these look huge. If there is a caveat over Brazil's supply, it is increasing domestic feed and ethanol use, raising its overall consumption by 9m tonnes or 15.7% over the past four years alone. That may mean a bit less for export this year than last. In Argentina, the new government's attempt to tackle an extreme fiscal deficit has resulted in duties on grain and oilseed exports which most analysts think may be raised soon. Latin American maize exports grew over 45% last season and as much as 68% versus the previous marketing year
  • The US planting outlook described above – if it progresses under normal weather conditions – could put down a powerful bearish marker going forwards
  • Traders will also be looking to EU, Ukrainian and Russian planting outcomes over coming months for clues to the adequacy of supply outside the Americas
  • On the demand side, the big bearish concern is the unknown impact of coronavirus on the global economy. Growth of meat consumption is heavily linked to consumer spending power, so could be significantly affected if things turn out badly on the economic front. A hit to feed demand is possible
  • Virus anxiety has already driven world energy markets down to their lowest in over a year – not an encouraging backdrop for corn ethanol demand, accounting for 45% of this year's US corn disposals
  • CBOT maize futures recently traded their lowest since mid-December last year while new crop months offer a relatively modest 5% premium over spot
  • Traders are not banking on China making an early contribution to US maize trade under the recent 'phase one' trade pact between the two – though it did recently buy a lot of US sorghum. US corn exports are running at almost half last year's level – a bearish weight on the market
  • Also, the EU, the world's largest importer, is forecast to take in 17% less this season than last.

More soya coming

Like maize, soya can expect a big top up in supplies this year if the US expands planting as much as expected in the wake of last year's flood losses. Trade and official estimates range from a 6% to an 12% gain to around 85m acres – if still not quite back to the 87.6/89.5 range of the previous two seasons. Assuming a yield bounce back to a more normal level, that could deliver a crop of 115m tonnes versus last year's 97m and the previous year's record 120.5m – enough to rebuild stocks drawn down after this season's unexpectedly smaller crop.

With Latin America now expecting big crops again (Brazil plus 8m tonnes at a record 125m), there should be no shortage of supply on the world market. However, there is currently some uncertainty about top meal exporter Argentina's role amid reports it will raise its export duties.

The bellwether CBOT futures market for soybeans has come down in prices by about 8.7% for the year to date, despite an earlier resurgence in Chinese imports of US beans after the two sides agreed a 'phase one' settlement to their trade dispute. Initially this reflected a slowdown in China's resumed purchases and signs that the big Latin American crops would again undercut the US on price.

More recently, anxiety about corona virus and the earlier outbreak of African Swine Fever flattening Chinese pork and soymeal consumption and the bean imports upon which its crush depends, have weighed heavily on sentiment on US and global soya markets – as have fears that a global economic slodwon might hit feed ingredient demand generally.

No-one knows where this situation will lead in the medium term which suggests the demand side of the market may dominate rather bearish sentiment, keeping soya costs down. China had been expected to account for 28% of global soya crush and 58% of imports this season albeit still using significantly less than in the peak period 2017/18.

Near/medium-term factors for soya and rapeseed

  • Final South American crop results
  • How US planting shapes up, weather there
  • How will corona virus affect China's – and the world's meat & feed demand, soya use?

Earlier strength in rapeseed markets went into reverse in late February as traders worried about bearish soya news spilling into other sectors of the oilseed complex. Top canola exporter Canada also worried about coronavirus standing in the way of a normalisation of its trade with China, which plummeted this past year over a political squabble.

European prices had also firmed sharply but amid reports that this season's tight supply was dragging in far higher imports (+46% to date). But that trend also backtracked as grain lobby Coceral estimated the bloc's 2020 crop might actually increase rather than fall, if remaining among the lowest of recent years after last autumn's rain delays downsized planted area and yield potential, especially in France and the UK (though Germany's crop could be heading for 10% plus gain).

A mild winter at least minimised frost damage. Canadian canola was also under pressure from ample domestic supplies and weakening crush margins as global vegetable oil markets softened, plus environmental protests threatening canola exports. Canada's Grain Commission estimated February stocks at their biggest since autumn 2016 and well up on the year. While Canadian exports are lower this year. Its own crush had risen more but has since come under pressure from collapsing palm oil and energy markets.

Biofuel is a massive outlet for canola which depends far more on oil value than other oilseeds for its income – meal being the loss leader. Among other suppliers, Australia lifted its crop forecast to 2.3m tonnes but this was still well down from normal.

Going forward, pries may be heavily influenced by how much Canada sows this spring in a season of so far better returns from wheat - and how quickly Australia recovers from its droughts, heatwaves and wildfires. Ukraine, which will again need to heavily supplement EU crush, has had a mild winter that should favour its coming crop. Overall, though, while canola has to follow potential losses in the much larger soya market, its own supply looks relatively tight going forward.

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