Commodities - MARKETS OUTLOOK 1508

8/20/2019 Commodities - MARKETS OUTLOOK 1508

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by John Buckley

Crop weather scares receding

GRAIN and oilseed markets saw a surprise but, in the event, unsustainable run-up in prices

during the period since our last review. Mostly this hump in costs was due to crop weather

scares and funds making the most of these in hope of an easy prot. Many of these events were

probably over-played, trading off uncertainties rather than major crop damage – so are now

receding in importance. That said, one or two key questions still need to be resolved, notably

the nal size of maize and soya planted acreages in the USA, the world’s largest grain and

oilseed producing country. There is also an unusually wide range of US yield forecasts for

both crops. Markets also need to see the outcome of a European heat-wave, already trimming

millions of tonnes off the maize crop, some changeable conditions at the tail end of an alreadyweather-challenging season in Russia and Ukraine and, not least, the extent to which drought

has reduced Canada’s wheat, durum and canola crops.

All of these factors have the potential to disturb prices further in coming weeks. However,

there are also some important-price restraining factors at work on both the supply and demand

side of the ledger. For the wheat market, these are led by better than expected crops (so

far) in Europe and the Black Sea region (Russia, Ukraine, Kazakhstan) and, perhaps even

more importantly, the USDA’s decision to make a big downward revision in its Chinese

consumption forecasts (down 6m tonnes for 2014/15 and another 5m for 2015/16). The latter

changes along with one or two other reassessments, have resulted in the USDA adding a hefty

16.5m tonnes to its forecast for global wheat ending stocks for 2015/16 (ends next June 30).

Because these are inside China, these stocks are effectively ‘off-market.’ They might also be

considered a slightly academic number, based on as many ‘guesstimates’ as facts. Nonetheless,they do put a slacker slant on the global wheat supply situation and, if these really are

anywhere near correct, they will have some inuence on China’s maize consumption and

import needs.

For maize and soyabeans, which we count with wheat as the three main market movers, there

are some some further bearish developments, led by larger than expected South American

crops. Looking at what’s emerging from local/national sources, some of these Lat-Am numbers

are probably still being under-estimated by the USDA - and other ‘ofcial’ analysts – both for

the 2014/125 season nearing completion (August 31) and for the new 2015/16 marketing year .

Assuming the weather doesn’t suddenly turn nasty for the second half of the Northern

Hemisphere wheat harvest – or the remainder of our maize/soya growing season, the outlook

remains much as we summed it up in our last issue: another year of large production, backed

by comfortable (mostly larger than average) carry-in stocks from last year. That ample supply,

moreover is set against no more than moderate growth of global demand.

Without a fresh weather scare ( and it would have to be a big one coming sooner than later for

now rapidly maturing crops) there is nothing much here to excite the speculator into another

round of betting on grain price rises. Indeed, one or two of the banks that like to forecast

agricultural market price trends are estimating grain values will fall below the levels indicated

by the forward futures price ‘curve.’ At this stage, it’s hard to disagree with that.

Wheat stocks to stay high

Apart from the larger Chinese wheat stocks mentioned above (estimated to cover about 40% of

world supplies), inventories are looking pretty comfortable in some of the market-inuencing

centres too. The EU is reckoned to carry in about 14/15m tonnes this year and, assuming

a crop somewhere around the 146/148m tonne level, it will leave 2015/16 with a similarly

large ending stock. This assumes the EU consumes something close to last year’s volume of

wheat, say around 124m tonnes, and again exports about 31m (which would be its third largestachievement, comfortable keeping Europe in the role of world’s leading exporter).

US wheat output, despite a number of weather problems, is expected to rise by about 3.3m

tones to 58.5m. Allowing for say 2/2.5m more domestic consumption, it can still export (if it

can nd enough markets for its relatively expensive grain) about 3.5m tonnes more than last

“Demand for US soya

will rise somewhat

from domestic

crushers while

exports will probably

slip under intensecompetition from

the Latin American

suppliers. At this

stage, the outcome

is expected to be

substantial growth

in US surplus stocks,

from under 7m to

about 11.5m tonnes”

MARKETS OUTLOOK

76 | Milling and Grain


2/6August 2015 | 77

season and, even then, end up with a larger stockpile than last

year of almost 23m tonnes (20.5m). The only real caveat is a

potential quality one after the soft red winter harvest got hit

by untimely rains – but at this stage that seems to be having

little impact on US or overseas prices, mainly because there is

so much cheaper soft wheat available on the world market at

harvest time. In fact, US soft red wheat for export is near its

seasonal (and ve-year) lows at around $206/tonne fob as we

go to press. Even the US hard, higher protein milling wheats are

relatively cheap by past comparison (see chart) – but often, still

not cheap enough to compete on the world market. The main

driving factor her is a stellar yield forecast for the US spring

wheat crop – maybe even a record high – which is good news

for millers seeking to use these to beef up the quality of their

grists.

Looking at the other major wheat suppliers, the Canadian picture

has been less encouraging after a drought hit the western half of

the Prairie wheat belt. The country’s Wheat Board has just comeout with a forecast of around 25m tonnes compared with 27.5m

from a recent USDA report, last year ’s 29.3m and the previous

season’s record 37.5m tonnes. It will reduce Canada’s export

role by about 5m or 6m tonnes (from 24.2m last season) maybe

a little more or less depending whether or not recent improved

rainfall gives the crop a late boost. Canada’s problems might

be to the advantage of US exporters later in the season – or the

gap might simply be lled by other suppliers - from the former

Soviet Union, Australia or even Europe. (In any event, world

wheat imports are expected to drop by about 3m tonnes this

season to offset Canada’s smaller crop somewhat).

Australia also has some dry weather problems, linked to the El

Nino phenomenon, which may cut its production well below

the expected 24-26m tonnes (last year 24m). That situation

should become clearer over the next few weeks but at this stage,

analysts are still looking for exports not too far off last season’s

17.5m tonnes. The other signicant South Hemisphere wheat

supplier, Argentine has also had some problems with weather,

delaying sowing and other disincentives (like government

interference in trade) possibly cutting planted area by as much

as 20% to what some say could be its lowest for 100-years.

Fortunately for foreign buyers, the markets have had a few years

to adjust to Argentina’s shrinking export role (from 12m four

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years ago to between 1.7m and 4m the past two seasons).

It has in any event, been long overtaken by the up and coming

CIS suppliers. Their story has been a more complicated one this

year – starting with damaging dry planting and autumn crop

establishment, some very mixed spring and summer weather

to date and the much-publicised challenge of getting enough

imported fertiliser on crops at a time of collapsing Russian and

Ukrainian currencies and other, general economic mayhem.

Strangely enough, it all seems to have worked out surprisingly

well. Early yields are up and wheat crops are currently expected

to be not much below last year ’s at some 94.5m for the three

main producers combined (97m).

Because exports last year were reined in at times (not least by

Russia’s imposition of an export duty from February onward),

both countries are starting with larger than expected stocks.

In Russia’s case, these may not be mostly in the government’s

strategic stock, as originally planned, but they are stil available

as an extra supply cushion that can help inuence a reasonably

liberal export policy.

Confusion was reignited a few weeks back when the Russian

government decided to introduce a new Rouble-based oating

export duty – unpopular with the exporters who saw themselves

getting into open- ended exposure when making foreign sales

in dollars, then sourcing in (recently highly volatile) Roubles.

In the event, this has not stopped them stepping up foreign

sales and, as they always seem to, setting the bar low for rival

exporters at the start of the new season (big sales recently to

Egypt and others, mostly beating the EU hands down on price).

How Russia’s (and other CIS) exports evolve in coming weeks

and months is of key importance to the EU wheat market. In

determining the world export price, it will feed into the EU

market value of wheat and – if it continues to undercut – should

bring benets to EU users in terms of lower costs. We have

already seen this on EU wheat futures markets which had

jumped from €176 at the time of our last review to as much

as €205/tonne at the end of June, when a French heat-wave

and other weather issues were threatening a lower Europeancrop. The collapsing euro during the Greek crisis didn’t help

that situation, helping to drive prices higher. In the event, as

mentioned above, wheat was mature enough to escape the

worst heat damage and the euro, for now at least, has been

displaying a bit of, albeit sporadic, resilience. But probably even

more important in bringing the price back to around €181.50

recently, has been the renewed pressure on global wheat prices

coming from the Black Sea region. EU wheat value will also be

inuenced, through the feed link, by the price of maize, again

determined to a large extent by how much the CIS nations can

produce and export and competition between the two grains for

custom. If this progresses as it has done for the last few years,

that may be another bearish factor in the price mix for feed

ingredients before long.

Where will US corn/soya plantings end up?

US weather has been the driving force in feed-grain pricing

over recent weeks as the trade tries to guess the impact of wet

weather delays on planted area and yields for the two biggest

crops – corn and soyabeans. The last analysis by the USDA

(in July) had US planted area for maize at 88.9m acres versus

last year’s 90.6m which with harvest acreage of 81.1m and a‘trendline’ yield of 166.8 bushels – equated to a crop of 343.7m

tonnes – about 17.4m under last year’s – but still the third

largest on record. That was matched against prospective US

consumption of 301.3m (unchanged from last year) and exports

of 48m tonnes (46m), leaving US ending stocks at a very

comfortable 40.6m. There is nothing overtly bullish in those

numbers although several of them will doubtless be exposed to

substantial revision – not least acreage and yield, for both of

which the trade has a wide range of estimates – both sides of the

USDA view.

Our hunch is that the acreage number may not be so far out and

that yields will be at least as good as USDA suggests, bearing

in mind all the moisture (‘rain makes grain’) and a recent drier,

warmer spell to get crops moving – but no erce heat on the

radar to spoil the key pollination phase, now well underway as

we go to press. Even if the crop were, say 10m or 15m tonnes

under forecast, stocks would not be as tight as in some recent

years unless the demand side of the 2015/16 equation had been

under-rated. US feed use, it’s true, might turn out a bit better

than USDA’s stable view - but only if US maize costs stay

cheap. Corn ethanol, the other big US outlet, no longer seems

to have much growth potential as demand runs up against the

‘blend wall’ set by the government’s usage mandate and world

energy markets stay on the oor amid a bearish global macro-

economic environment. Also, US maize exports may not

increase, as USDA expects, if the plentiful foreign competition

continues to undercut, as it does now, from rival Latin American

and CIS suppliers.

Globally, corn production is seen down slightly in the new

season that starts September 1 at 987m tonnes versus last year’s

record 1,002m, according to the USDA. The lion’s share of that

drop is down to the smaller US crop, the rest to the EU (minus

9-10m), Brazil (-5m) and Ukraine (-2.5m tonnes).

The EU outlook has been a bit of a shock to the trade here,

expecting a better result before unusually severe, dry, heat-

waves developed across France, Germany, Czech Republic,

Hungary etc during the past couple of months. However, thesupply gap can be managed by increasing imports from the CIS

group which, judging by recent market movements there, look

likely to remain cheap.

Brazil’s next corn crop is probably well under-rated by USDA



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at 77m tonnes and, for the second year running it has huge

carry-over stocks to supplement its exports. The world’s

second-largest corn supplier is already harvesting and shipping,

undercutting US prices - as is its neighbour Argentina and the

two main CIS exporters, Ukraine and Russia.

On the global demand side, the biggest factor outside the US is

China, expected to consume 4m tonnes more maize next season

than this. But China’s own crop is estimated to have jumped

by over 13m tonnes and its surplus stockpile is seen ballooning

from an already huge 80m to as much as 92m tonnes, almost

half the world’s total corn stocks – so no big imports needed

there.

World corn demand is expected to grow by a moderate 8.5m

tonnes in total. Apart from China and the EU (+2m), a few other

countries including Brazil, Argentina, Egypt and Canada will

consume more next season than this. However, most of these are

self-sufcient/in surplus, so the consequent impact on import

demand will be modest. Overall there should not be much needfor maize stock drawdown – perhaps 4m or 5m tonnes, leaving

the total well above the low levels that fuelled big price rises on

the global maize/feedgrain markets three or four years ago.

So, assuming the US crop comes through within the ballpark

of recent estimates and no other weather disruptions occur, the

world should be adequately supplied with corn to meet its needs

at today’s – or perhaps cheaper – prices. Despite that, the CBOT

futures market still has corn costs pointing ‘North’ to the tune

of about 8.5% into mid-2016. However, a number of private

analysts think that over-rates the impact of slightly lower global

stocks. EU corn futures meanwhile suggest a more modest 2-4%

price increase going into latter 2016, despite the domestic crop

upset. That also seems to suggest condence in adequate foreign

supplies to ll the gap.

Soya surplus continues into 2016

Like the grains, soya products jumped in price during June as

the Chicago market reacted to concerns about rain delaying and

downsizing US plantings. For European importers of beans and

meal, the price strength was enhanced by the weakness of the

Euro as the Greek monetary crisis ared.

However, since mid-July, the US market has been in steep

retreat with improving US weather and persistent market

ideas that soya acreage there might have been under-rated.

Crop condition ratings are below last year’s when yields and

production reached record levels but there is still plenty of time

for improvement. So while the next US soya crop will likely

be down from last year’s 108m tonnes it will probably not fall

much and should still be the second largest ever.

Demand for US soya will rise somewhat from domestic crushers

while exports will probably slip under intense competition

from the Latin American suppliers. At this stage, the outcome

is expected to be substantial growth in US surplus stocks, from

under 7m to about 11.5m tonnes.

However, even that is eclipsed by what is happening ‘down

South.’ Brazil and Argentina have not only already produced

record crops for 2014/15 (recently harvested). Both are also

carrying in record stocks of over 34m and 21.5m tonnesrespectively. Moreover, both are now expected to plant large

crops again this autumn for harvest in 2016. On present

pointers, the USDA expects total 2015/16 soyabean supply to

approach 400m tonnes compared with the past season’s 381m

and the previous year’s 340m. Demand is not growing as fast,

however, resulting in global stocks rising yet again to a new

peak of almost 92m tonnes. That’s equivalent to about 73m

tonnes of soya meal - even before the next crop is grown. To

put that in context, world soya meal demand is only expected to

grow in 2015/16 by about 10m tonnes.

The outlook is less encouraging for the two main oilmeal

sources grown in Europe – sunowers and rapeseed. EU farmers

reduced plantings of sunseed slightly and now seem likely to get

lower yields too. The crop has recently been estimated at 8.2m

tonnes versus last year’s 8.94m but some analysts think that’s

now a bit optimistic. Among the EU’s foreign suppliers, Ukraine

expects a smaller and Russia a slightly better crop. Overall,

the CIS region should have just under 20m tonnes, similar to

last year. Another key source, Argentina, expects slightly less

output. Overall, world sunower production is expected to drop

by about 500,000 tonnes on top of a 3m tonne decline in the

previous year.

Rapeseed supply looks far worse, however, with world

production forecast by the USDA to drop to around 67m tonnes

from last year’s record 71.7m, partly due to dry weather curbing

yields and partly lower plantings (especially in Europe). Other

estimates are even lower. Top producer Canada is expected to

harvest 12.5/13.5m tonnes versus 15.6m last year and almost

18m the year before. Some EU estimates are below 21m tonnes

compared with last year’s 24.3m. CIS production, some of

which makes its way to European oilseed crushers is also seen

dropping by 800,000 tonnes to 3.8m and Australia’s crop from

3.4m to perhaps 3m. Global rapeseed crush is expected to

drop by about 3% - its rst decline for some years - and even

that will mean stocks tightening to their lowest for quite sometime. Fortunately for oilmeal users, any lack of sunower and

rapeseed meal can be replaced with abundant supplies of soya

– the market leader and price setter - although, obviously, that

means more soya imports subject to uctuations in the world



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market and what happens to the euro/dollar exchange rate.

Hopefully the sheer weight of soya supplies will have the greater

effect in keeping costs down. Soya meal makes up about 70% of

world oilmeal supplies, rapeseed meal about 13% and sun meal

around 5%.

KEY FACTORS AHEAD - WHEAT

• The size of Russia’s crop – somewhere between 55m and 58m

tonnes? Russian exporters are already taking an aggressive

pricing role, intent on reclaiming their reputation as not only

a cheap but reliable supplier. Ukraine also has a big crop and

will compete for the role of oor price-setter in export markets

against EU and other rivals.

• EU quality is still an unknown but some early pointers are

promising for millers

• World stocks of wheat carried into 2015/16 continue to offer a

thick cushion against any crop weather problems in the months

ahead.• The further drop in wheat values back towards or, for some

farmers, below cost of production remains an issue that may

affect future sowing plans.

COARSE GRAINS

• Will the US maize crop forecast be revised up if current ideal

growing weather continues? Either way, hefty stocks should

keep this market amply supplied in the season ahead.

• Ukrainian maize output will likely fall this year but remain

large in comparison with the previous decade, maintaining

its role as a cheap exporter to markets including the EU. And

Russia has more maize than last year to export.

• Along with ample maize supplies from Latin America, this

should maintain the more competitive global export market for

maize seen in recent years – another restraint on price.

• A forecast smaller EU maize crop this summer may need more

imports but there should be no lack of supplies at competitive

prices.

• Competition for coarse grain custom will continued between

large maize, wheat and adequate barley supplies, again helping

to contain feed costs.

OILMEALS/PROTEINS

• Huge soyabean crop surpluses across the Americas continue

to offer potential for cheaper global oilmeal costs as 2015

progresses, despite the downturn in alternative oilmeal supplies

from rapeseed and sunowers .• Will lower costs and ample supplies of feed inputs encourage

more demand than expected for these products in countries

expanding their livestock production systems – China, India,

Indonesia etc? Developed consumers like the USA may also

use more as high meat prices boost protability. There is

plenty of room to meet bigger feed demand without tightening

supplies or raising prices.

• Soya meal will continue raise its already dominant share of the

protein market, demanding price restraint across the sector.

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August 2015 | 81

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