April 02, 2015

02/04/2015: Commodities: Markets Outlook

by John Buckley
 
First published in Milling and Grain, February 2015    

Wheat market absorbs Russian export curbs
GLOBAL wheat markets have spent most of 2015 to date in retreat from a steep run-up in prices in the final weeks of last year. Many readers may be aware that the main element in that upturn was the decision by fourth largest exporter Russia to curb the too-rapid flow of its once-plentiful milling wheat onto world markets at a time when doubts were rising about the size of its next harvest.

As the rouble nosedived with the  collapse in value of Russia’s crude oil exports and Western sanctions – keeping Russian exports cheap - there did seem a real risk, as the year turned, that too much of its wheat would be snapped up by foreign buyers, leaving its domestic market short and at risk of escalating costs for that most basic staple, bread. Russia is also thought to need more wheat and other cereals for animal feed this season as it tries to boost domestic livestock output to replace embargoed meat imports from Europe and the USA.
 
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Mindful that it couldn’t simply embargo exports without reneging on its WTO obligations, Russia initially used various indirect measures to slow them down, led by stricter phytosanitary (plant health and other red tape. These certainly put the brakes on trade during the late December/early January timeslot. However, they’ve now been overtaken by the introduction of a more direct instrument in the form of an export duty, recently equal to around E30/$40 per tonne, applying from February 1. This has been effective in cutting off further Russian sales in recent weeks, yet seems to have been absorbed by the markets without less fuss than the earlier indirect measures.

Prior to the export curbs, Russia was expected to supply about 22m tonnes or 14 percent of the world’s wheat import needs in 2014/15. The lion’s share of this, about 17-18m tonnes, has already been shipped, already more or less matching Russia’s bumper 2013/14 exports - with half the current season still to run.
That partly explains the muted market reaction, despite the latest news that neighbouring Ukraine’s government had also agreed ‘voluntary’ curbs with its exporters on its Feb/Mar wheat sales.

These could be loosened up somewhat if its own winter wheat crop emerges in reasonable condition from what (for both countries) has been a fairly challenging winter to date (dry start, poor crop establishment, some snow cover issues raising greater than usual risk of ‘winterkill’ etc). However, like Russia, Ukraine has already shipped out the bulk of what it intended to export during 2014/15 so this doesn’t leave a huge gap in the market. At worst, the CIS absence means the floor price of wheat on world markets is a bit higher than it would have been, had both continued selling freely (i.e. no longer rock-bottom).
  
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Even if Russian sales fall 2m to 4m tonnes short of the target 22m this season, there is no shortage of contenders to take its place. Top of the list has been the EU, which has recently seen some of its best weekly export sales of the season and now seems on course to match, if not exceed last season’s record 30m tonne total. It could sell even more without leaving EU consumers short. Even after consuming an extra 9m tonnes in animal feeds, Europe is still expected to finish with carryover stocks of about 17m tonnes compared with just 10m when the season started, thanks to last year’s massive domestic crop.

However, what this good clearance of EU wheat supplies has done, along with the weakest euro/dollar exchange rate for 11-½ years has been to lift internal wheat prices off the 4½-year floor they tumbled onto last September. As we go to press, the European milling wheat futures market is trading about 30 percent over those lows, if still about 9 percent below its 2014 highs. Feed wheat prices had also dropped with this season’s larger low/middling grade soft wheat supplies in countries like France. The UK market has frequently been even weaker than the Continent due to the relative strength of sterling versus the euro.
 
While consumers obviously won’t cheer any cost increases, most will probably recognise that farmers who last autumn faced break-even or loss-making prices have to make a living too, to ensure continuity of supply.

Summing up, world markets, where the value of wheat is ultimately ‘made,’ still appear to be amply supplied for the rest of 2014/15 to end June. The USDA’s own global crop estimate has even risen further since our last review, by about 3m to a new record 723m tonnes, or about 8m more than last year. USDA has also edged up its estimate of global wheat consumption although this remains about 10m under production which means end-season carryover stocks rise by the same amount to a comfortable 196m tonnes – about 27.5 percent of projected consumption or 14 weeks supply.
   
These extra stocks provide a cushion against an expected smaller world wheat crop in 2015. Recent estimates suggest the negative outlook for Russian and Ukrainian crops will knock about 10m tonnes off their combined output this summer.  That might be offset somewhat if they plant more spring wheat but that yields less than winter wheat. There is also much concern about how both countries will finance their seed and input needs for these crops (especially the significant imported portion of these) as their currencies continue to tumble – a factor that could take another bite out of yields.
  
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The EU’s own 2015 wheat outlook is a bit of a mixed bag with some countries apparently sowing a bit less, others more, some in need of more rain, some at risk of possible frost damage etc. One recent private estimate suggested output could be about 7m tonnes down from last year’s crop based on yields also coming off last year’s highs. However, it shouldn’t be forgotten, that the 2014 crop was a record one at 155.5m tonnes, 12m more than in 2013 and 22m over 2012 – so this would hardly be a disaster.

The USA has also had some weather issues affecting winter wheat potential, lingering dryness in some areas, frost threats in others and a general crop rating below this time last year’s. Even so, some analysts expect a slightly larger crop based on area increases.
     
Canada’s crop is a bit of an open book at this stage, the bulk not sown until the spring so much depends on weather then and relative returns from competing crops like rapeseed. Current government thiking there is that overall acreage will increase by almost 800,000 acres but the lion’s share of that gain will be for duruym rather than spring breadwheats.

Among the other big suppliers, Australian and Argentine crops (technically 2014/15 harvests but the bulk marketed in 2015) are both adequate. Australia is currently expected to export at least as much as last year’s 18m tonnes while the USDA sees Argentine trade exports soaring from just 1.6m in 2013/14 to as much as 6m tonnes.  However, that assumes a less restrictive export policy, which may an be optimistic hope, given that the government has only recently told exporters they won’t get permits unless they pass on a fair share of the world prices to farmers. 

That said, the above export potential is easily enough to make up for any Russian shortfall - albeit at a higher price than if Russia had continued to sell freely.
But the list doesn’t end there. To these regular exporters can be added other ‘non-traditional’ potential wheat suppliers. India burdened with huge stocks after three successive large harvests, wants to export about 2m tonnes while neighbouring Pakistan, more frequently an importer, reportedly plans to put about 3m tonnes on world markets.
     
Finally we should not rule out both Russia and Ukraine returning to the market as exporters sooner than harvest time. It has happened before after past embargoes and both will want to do all they can to re-portray themselves as reliable suppliers, once their domestic needs appear to have been safeguarded.
Overall then, there is nothing much in wheat supply/demand ‘fundamentals’ to justify price rises and, depending how the CIS crops shape up, maybe even potential for cheaper wheat. This isn’t yet apparent on the US futures markets where the forward months carry a small premium. However, European new crop wheat is slightly cheaper than current months.

Maize crop estimate trimmed – but still huge
Like wheat, maize has been getting cheaper into the New Year after an earlier run-up in prices. The latter move reflected a combination of factors  including better than expected domestic and export demand for US maize,  ideas the latter’s 2014 crop had  been over-rated, forecasts that its farmers would sow less in 2015 and some dry weather issues overhanging prospects for the South American harvests coming on stream this spring.

Given the way some of these fundamentals have shifted to a more bearish slant in early 2015, it seems mildly surprising that the US market hasn’t come down more (At the time of writing it’s lost about 9 percent from its mid-December value).

Probably the biggest undermining influence has been the 60 percent collapse in the international value of crude oil under the weight of the US shale gas boom and OPEC’s (mainly Saudi’s) attempts to make up in volume what it’s lost in unit revenue (and by doing so, maybe help drive its new competitors out of business).
It’s hard to over-state the impact that ethanol has had on US maize disposal and values and, to a lesser extent total world grain use in the fuel sector in recent years. Ten years ago, US annual maize use in this outlet was a mere 33m tonnes. This season it’s expected to exceed 130m.

When crude oil prices began their collapse earlier last year, it was assumed that usage would remain protected by the government’s legally binding minimum blending requirement within the Renewable Fuel Standard. But as crude prices continued to fall far beyond anything the ‘experts’ could have imagined, market chatter has begun to question not only the level of discretionary (voluntary) blending but the longer term viability of the mandate itself. There have even been some moves in Congress to challenge the mandate although current opinion suggests these are unlikely to succeed at this stage.

Still, the fundamental question needs to be answered, what happens to ethanol demand in the longer term if the green fuel can’t be produced as cheaply as petrol? No one saw this coming and opinion is unsurprisingly split on how long it will last. Will crude’s demise contain fracking and reduce less-economical fossil fuel production and, if so, over what timeframe? The irony is that US ethanol production was recently running at record levels, buoyed up by the collapse of  maize feedstock costs over the past two years.

Whether or not ethanol continues to account for about 40 percent of US corn disposals, supplies of the coarse grain will remain in substantial surplus. Even after trimming the US 2014 crop estimate by almost 5m tonnes in January, the USDA still has production at an all-time record high of 361m tonnes. That compares with US consumption of 301m and exports of 44.5m. The surplus will allow the US to go into 2015/16 season with 48m tonnes of stock versus 31m this season and just 21m the previous year.

Global maize output is meanwhile estimated at 988m tonnes – about 17m over consumption, resulting in stocks rising by that amount to 189m. As in the USA, this is the highest stock for some years. It’s moderated somewhat by the fact that over 40 percent of it is held in China, whose figures are often considered unreliable and whose quality is usually thought questionable in comparison with maize from the other big producers. Nonetheless, the market must accept that maize – on paper/in fact – is in loose supply.

In recent weeks, maize markets have also been watching the weather in South America, which seems to have improved after a dry start in Brazil and some excess rain and flooding in Argentina. Some Brazilian private estimates are running about 5m tonnes over the USDA’s 75m tonne forecast (down about 4m on last year). Argentina is expected to produce about 22m versus last year’s 25m tonnes. 
    
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Although previously up-and-coming exporter Ukraine’s last crop was also 4m tonnes lower than the previous year’s it is still a big one by historical comparison. Its exports will be down by a similar amount and have so far been a bit slower than expected. However, as we go to press, it seems to be stepping up sales and undercutting the dominant US exporter by about $8 to $10 per tonne.

US exports have performed quite well so far this season, underpinning prices on the bellwether Chicago futures market to some extent. However, with Ukrainian, then Lat-Am competition expected to pick up later into first quarter 2015 and beyond, export-based support for US prices will likely diminish. Although US feed demand is thought to be expanding this season (helped by lower maize costs amid higher meat prices) it may not be enough to fend off bearish supply-side pressures if ethanol demand does weaken.

Further forward, crop analysts have been expecting the US sow less maize this spring but a predicted shift to soyabeans may be smaller than earlier thought as soya prices are currently dropping faster. As always, though, the weather at planting time will have a huge influence on the mix of crops.

Within the EU, maize demand is expected to edge up by about 1m tonnes to a new peak of 77m but with the domestic crop up by almost 10m tonnes, Europea consumers will be able to slash their dependence on imports from 16m to perhaps 6m or 7m tonnes. With demand from other importers expected to be down by a similar amount, maize looks more and more like a buyer’s than a seller’s market. As in the wheat market, then, there is not much in the fundamentals to support higher prices going forward - despite US futures markets quoting new crop up to 10 percent dearer than current months.

Soya supply glut looms
If Europe were growing more soyabeans, rather than importing the bulk of its 13.5m tonne crush, meal costs might be falling with the global trend amid the largest surplus on record. However, while dollar-quoted meal prices have dropped by about 25 percent this season, the euro has tumbled to its lowest in 11 years versus the US currency, keeping prices on the Continent more expensive than in the autumn of 2014. Even UK consumers cushioned by relatively stronger sterling versus the euro, are not doing so well when dollars are turned to pounds, robbing them of much of the benefit of the sliding US price.
That said, European meal costs are at least being restrained somewhat by the supply glut and, as the largest ever South American soya harvests crank up, this could yet exert more downward price pressure on both sides of the channel.

Most of the increase in this season’s global oilseed and meal production is in soyabeans, for which world output has recently been estimated at 314.5m tonnes – up by about 2m since our last review and a hefty 30m tonnes over last year’s crop. That increase would equal about 24m tonnes more meal if all were crushed. In fact, only about half the extra beans will be used for feed, creating about 11.5m tonne more meal – which roughly equals the expected rise in this season’s global meal demand.

The high end-season stocks of soyabeans (a record 91m tonnes versus last year’s 66m and about 55m in the previous two seasons) provide an ample cushion against any supply shortfalls from coming soya crops. Over the past two months, weather has steadily improved for South American oilseed crops, confirming record output to be marketed over coming months. A weak Brazilian currency should help ensure good exports from the major supplier to cash in on the strong dollars in which beans are traded. Estimates have recently been raised for Argentina’s coming crop, which should ensure very large exports from this supplier too. Argentina crushes two thirds of its crop to export as meal, for which it is far and away the world’s largest supplier.

In a couple of months’ time, the US will start planting its own soya crop which some analysts think will expand by about 2m acres to cover a new record area. Even if yields dip from last year’s record highs closer to the long-term trend, that would deliver another ‘mega crop,’ currently seen around 104/105m tonnes – below last year’s record 108m but far more than the normal 85m/90m tonnes of recent years.

Of course, we have yet to see what weather will accompany the US sowing and growing season up to September. But if conditions are normal, it is hard to see how this supply outlook can point to anything but flat to weaker prices. The futures markets currently show only small discounts on forward soya beans and meal. However, some analysts see leeway for bean prices (already down 37 percent from last summer’s highs) to drop by a further 10-15 percent under this scenario, As soya is so protein-rich and usually a reliable quality leader, pricing of other oilmeals will, as usual, have to broadly follow the soya price trend.

The European feed industry is expected to use about 1m tonnes more soya meal this season. The rest of the increase is spread over China (+5m), the USA (+1m), Brazil (+0.4m) and a number of small/moderate-sized consuming countries.

KEY FACTORS AHEAD
WHEAT
  • Concern persists over the state of Russian winter sown wheat crops, a larger percentage than normal described as in poor condition. A better picture will be available when plants emerge from dormancy in the spring. The outcome could have considerable influence on wheat prices going forward – at this stage seen more bullish than bearish.  
  • Ukraine has also had some over-wintering problems tha will become clearer in a few weeks’ time. Its massive currency devaluation during February (in addition to an earlier long slide) augurs ill for spring crop finance and yields – although maybe it will get some financial help fro western aid packages. Russia also faces problems of spring crop finance at a time when it needs to boost sowings on failed winter crop lands.
  • Crop ratings have continued to deteriorate for US winter wheat for harvest 2015 but some timely rains could yet allow some recovery. This has not emerged as a major factor yet because the most affected crop has been soft red wheat, for which export demand remains poor amid hefty foreign competition for this class.
  • European crops have had a generally unchallenging, mild winter but lack of ‘hardening off’ leaves them exposed to frost damage from late cold snaps.
  • World stocks of wheat carried into 2015/16 remain hefty, a cushion against any crop weather problems in the months ahead.
  • The drop in wheat values close to or, for some farmers below, cost of production remains an issue that may affect future sowing plans.
  • Decent quality premiums will continue to merited for milling/bread wheats as feed wheat prices remain under pressure from large, cheap supplies of coarse grains.
  • Global feed consumption of wheat is still expected to rise by about 10m tonnes this season but remain below the high levels of three years ago. But will ethanol use of wheat hold up at expected levels in Europe under the low oil-price scenario?

COARSE GRAINS

  • How much maize will the US sow in 2015? Current forecasts suggest a cutback but still enough for another large crop which, with large carryover stocks from this season, will keep this market well-supplied.
  • Ukrainian and Russia spring sowing of maize may face financing challenges caused by their lack of access to credit, weak currencies pushing up imported input prices. A clearer picrure may be available on this factor within the next couple of months
  • Ample maize supplies from Latin America and the CIS countries will continue to compete at discounts to US exports in Asia, Europe and other markets, restraining CBOT maize futures prices and global prices.  
  • The EU has been well supplied with its own maize crop this season, enabling it to slash imports – the main factor in a lower global maize trade. Will it sow as much for 2015?
  • Competition for coarse grain customers continues from larger than usual feed wheat and adequate barley supplies, helping to contain livestock feeders’ costs
  • Will the US ethanol industry continue to use as much maize if the price of conventional petrol stays down/gets cheaper still?
  • Declaring its policy to move to a more ‘market-oriented’ plan, China could draw down more of its own massive reserve stocks – rather than imports - to fill its ongoing annual gap between domestic crops and growing consumption. That would removes a potential bullish influence for world maize export markets

OILMEALS/PROTEINS

  • Large US and Lat-Am soyabean crop surpluses continue to offer potential for cheaper global oilmeal costs as 2015 progresses
  • Lower oilmeal costs and ample supplies may yet spur greater than expected demand in countries developing livestock production systems – China, India, Indonesia etc. Developed consumers like the USA may also use more as high meat prices contribute to profitability.
  • Rapeseed and sunflower expansions have slowed down or reversed in the past year but as ‘oil-rich’ oilseeds these will have less impact on the meal sector.   
  • One result is that soya will raise its already dominant share of the protein market. As the high-protein, reliable quality and most voluminous product, its price trend will have to be followed across the meal sector.


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