August 14, 2015

14/08/2015: Grain & Feed Market Review

Commodities by John Buckley   

First published in Milling and Grain, August 2015

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 profit. 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 final 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 already weather-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 influence 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 ‘official’ 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 percent of world supplies), inventories are looking pretty comfortable in some of the market-influencing 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 largest achievement, 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 find enough markets for its relatively expensive grain) about 3.5m tonnes more than last 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 five-year) lows at around US$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 come out 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 filled 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 significant 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 percent 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 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 still available as an extra supply cushion that can help influence a reasonably liberal export policy.

Confusion was reignited a few weeks back when the Russian government decided to introduce a new Rouble-based floating 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 benefits 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 heatwave and other weather issues were threatening a lower European crop. 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 influenced, 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 fierce 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 floor 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, the supply 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 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-sufficient/in surplus, so the consequent impact on import demand will be modest. Overall there should not be much need for 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 percent 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 percent price increase going into latter 2016, despite the domestic crop upset. That also seems to suggest confidence in adequate foreign supplies to fill 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 flared.

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 ev

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 tonnes respectively. 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 – sunflowers 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 sunflower 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 percent - its first decline for some years - and even that will mean stocks tightening to their lowest for quite some time. Fortunately for oilmeal users, any lack of sunflower 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 fluctuations in the world 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 percent of world oilmeal supplies, rapeseed meal about 13 percent and sun meal around 5 percent.

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 floor 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. 

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 sunflowers .

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 profitability. 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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The Global Miller
This blog is maintained by The Global Miller staff and is supported by the magazine GFMT
which is published by Perendale Publishers Limited.

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