Wheat still ‘Russian’ out the ports …

Grain Brokers Australia > Weekly Wire

by Peter McMeekin

The price and pace of Russian wheat exports combined with the further uncertainty regarding export restrictions continued to be the dominant influence on global wheat futures markets over the past week.

The market opened sharply down last Tuesday following the long weekend in the United States (US). This was followed by two more negative days and a very subdued session on Friday that was basically unchanged. However, the market rallied strongly in the first trading session this week, as the trade positioned itself ahead of the next United States Department of Agriculture (USDA) report which is due to be released on Wednesday.

According to reports out of Russia, wheat exports in the first quarter of the marketing year (July to September) will be close to 14 million metric tonnes (MMT). This continues to prevent incremental export demand moving to other origins such as the US.  This fact was certainly reflected in the most recent US export figures.

The latest Egyptian (GASC) wheat tender lineup also echoed the dominance of the Russian exporters with 660 thousand metric tonnes (KMT) offered and all were Black Sea origin, 600KMT of Russian and 60KMT of Romanian. GASC picked off the low hanging fruit by booking one cheap cargo of Russian that was offered at US$6-8 below the other sellers.

It seems that the ‘fake news’ phenomenon is not confined to the US. Early last week wires were reporting another about-face in Russian wheat export policy. This followed a meeting between the government and exporters that had supposedly resulted in a decisive “no export restriction” statement from the government.

However, people present at the meeting are advising that no such statement was made, and the government will continue to monitor all export data, port stems and exporter programs. Nonetheless, it seems that the US futures markets are trading the ‘fake news’ as opposed to the ‘real news’ at the moment.

The Russian export uncertainty is creating a highly volatile global futures environment which is distorting the global market and driving the urgency for Russian exporters to ship grain as quickly as possible. This will add to the global rationing required in the first half of 2019 as the availability of export stocks decreases.

Another piece of news the market seems to have been ignored in recent weeks is the size of the Canadian wheat crop. Stats Canada pegged it at 29MMT, as opposed to the United States Department of Agriculture forecast of 32.5MMT. This would put Canadian wheat production down 1MMT year-on-year.

The story is similar here in Australia where the wheat crop is getting smaller despite suggestions that Western Australia (WA) may harvest upwards of 11MMT. The Queensland and New South Wales crops will struggle to be much over 2.2MMT. The Victorian crop is probably around 2.2MMT with the Mallee region deteriorating fast. I have seen some South Australian crop forecasts as high as 4MMT, but my scouts suggest it is more like 2.9MMT. If we call WA 10.5MMT for now, that comes to 17.8MMT nationally.

Downward revisions to both the Canadian and Australia wheat crops and some global demand rationing is certainly expected when the USDA releases their updated numbers later this week.

In Argentina, the rumoured export tax has finally been confirmed by the Macri government. To the surprise of the market, the authorities opted for a pro rata tax rate of 4 pesos per US dollar (USD), as opposed to the expected flat rate of 10 per cent. At the current exchange rate of around 37 pesos per USD, the tax is very close to 10 per cent. The challenge for the market is that the tax is tied to the exchange rate and consequently, it will fluctuate on a daily basis.

Uncertainty around how the tax will work and how it will be administered has put the market in a state of disarray. The Argentinian farmers are notorious for holding their production as a hedge against inflation. This will only be exacerbated if they expect the peso to weaken against the USD. Not what the government wants, as a weakening peso will generate lower export tax income.

On the flip side, the Argentinian farmers have commenced planting their summer crop, and this will require working capital. October is the peak planting month for corn and November is the peak month for soybeans. With interest rates at 60 per cent (yes, 60), the banks will not be knocked down in the rush for crop finance. Farmers will more likely liquidate old crop stocks to fund the new crop program as and when required.

Back to the Russian situation. Nobody really knows the true supply and demand equation in a country with a very fragmented market, inefficient logistics and quite opaque market intelligence. We know that production was down from last year and we know exports will have to be lower. How much will be consumed domestically is a huge variable and will ultimately determine the exportable surplus.

Meanwhile, wheat will keep ‘Russian’ out the ports until lack of supply or export restrictions stem the tide.

Sell the rumour, buy the fact …

By Peter McMeekin > Weekly Commentary

Global futures markets were sharply lower across the board last week and early this week, as the market digested the growing United States (US) corn and soybean yields, lagging US export sales and the Russians downplaying the persistent rumour of possible wheat export restrictions.

The annual Pro Farmer crop tour concluded on Friday and the results certainly confirmed that the US is in for a bumper summer crop harvest. After examining more than 2,800 corn and soybean samples, analysts pegged the US corn yield at 177.3 bushels per acre (bu/ac), producing 14.501 billion bushels (368MMT). This is slightly lower than the most recent United States Department of Agriculture (USDA) estimate of 178.4bu/ac.

The soybean picture was even brighter with pod counts more than 10 per cent above last year, resulting in a yield estimate of 53bu/ac. This is 1.4bu/ac above the USDA’s August forecast, producing a total of 4.683 billion bushels (127.5MMT). Chinese export demand is the key here and “Don’s Party” (US trade tariff war) is not helping. China is currently stocking up on Brazilian beans and is also expected to decrease imports by 6MMT to 93MMT, thereby decreasing their requirement for the US product.

Wheat suffered the most, with falls across all the major European and US bourses. The funds had built significant longs over the past few months and profit taking saw them liquidate more than 35 per cent of this position. As a result, the market has given most of the past month’s gains.

Nevertheless, this was certainly not driven by market fundamentals. The global wheat balance sheet remains tight. Late last week the International Grains Council (IGC) lowered their global production forecast by 5 million metric tonnes (MMT) to 716MMT. They took 3MMT off the Australian crop, but still have it above 20MMT.

One of the key numbers to come out of the IGC report was a substantial decrease in the ending wheat stocks held by the major exporters. They are projected to fall to 62MMT by the end of the 2018/19 season, down from 81MMT at the end of the previous season. The major contributors to this decline were Russia, down 33 per cent to 10MMT, the EU, down 31% to 13.7MMT and the US, down 18 per cent to 24.7MMT.

As we have seen in recent years, Russia holds the key to global wheat values. Despite their protestations, the trade believes there is still a distinct possibility of Russian wheat export restrictions later in the season. Exports above 30MMT appear to be the potential trigger.

The IGC has penciled Russia in for 30.4MMT of exports in the 2018/19 marketing year. This is 4.6MMT below the USDA forecast. They are currently exporting around 1MMT of wheat per week. At that pace, exports would hit 30MMT in February. However, it would be optimistic to think that pace could be maintained through the approaching winter months.

Here in Australia, ASX wheat futures fell $14 last Friday, to close at $395. New crop APW bids were easy across all port zones. The export states of South Australia (SA) and Western Australia (WA) saw the most dramatic decline with Port Adelaide, Port Lincoln and Kwinana values all down around $20. Feed barley prices fell at least $25 in the same port zones.

The fall in international values undoubtedly had an influence, but so did the forecast of rains throughout the key demand regions of northern New South Wales and southern Queensland. Generally disappointing would be the best way to describe the outcome. As happens so often during prolonged dry spells, the weather forecast promised more than was eventually delivered.

Not even a change of Prime Minister could open the heavens and provide some drought relief. Scott Morrison will see, and experience, the desperation first hand this week when he visits parts of western Queensland that have been drought declared for more than five years.

The focus for the northern New South Wales and southern Queensland grain grower has now switched to summer crop. The sorghum planting window is fast approaching and soil moisture is desperately required. Most growers would require at least 100mm to get the ball rolling. The soil temperature is still too low but once it reaches 14 degrees and rising then the game begins, as long as the rain arrives.

Whilst sorghum cannot replace all of the white grain demand, it can certainly replace some. With adequate rain, the potential sorghum plant is huge, and the pressure then comes off feed grain values. Without it, prices remain supported and the east coast domestic consumer will continue to rely on imports of wheat and barley from Victoria, SA and WA until the 2019 winter crop harvest replenishes stocks.

In the mining industry, there is a saying: buy the rumour sell the fact. When it comes to the current Australian grain market environment, it is more like sell the rumour (forecast of rain), buy the fact (disappointing rainfall outcomes).

Low barely supplies sees users scrambling

Grain Brokers Australia > Weekly Wire

by Peter McMeekin

Wheat, corn and soybean production numbers stole the limelight when the US Department of Agriculture released their latest World Agricultural Supply and Demand (WADSE) estimates on August 10.

Meanwhile, barley chugs along, running its own race, with potential global supply and demand issues seemingly flying under the radar. The USDA dartboard has come up with 2018-19 global production at 144.4 million tonnes. This is unchanged year-on-year but down 3mt and 5mt on the 2016-17 and 2015-16 seasons respectively.

Like wheat, there are certainly some discrepancies between the USDA numbers and estimates emanating from the major producing countries themselves. EU production, for example, was placed at 59.2mt by the USDA but many European based traders fear the crop will struggle to get any higher than 57mt.

The scariest part of the domestic (barley) story is that we are still in winter and many parts of the east coast are already a write-off.– Peter McMeekin, Grain Brokers Australia

Moving east to Ukraine, the local industry estimates suggest the crop will be 7.5mt at the most. That compares to the USDA projection of 8mt, both of which are lower than last season at 8.7mt. The production decline in Russia is even more dramatic with the current harvest expected to come in at a four-year low of 17mt. This represents a 16 per cent decline on the 2017-18 crop of 20.2MMT.

Canada is the only major producer where the USDA expects to see an increase in production. This is on the back of a 10 per cent increase in plantings. However, the end of season weather has not been kind to the maturing crop and reports from local Canadian crop scouts suggest that production will be more in line with last year’s number of 7.9mt, rather than the recent USDA projection of 8.8mt.

The two major barley producers south of the equator are facing quite differing scenarios. Increased plantings in Argentina are expected to yield around 4mt, compared to 3.7mt last year. While here in Australia we have a tale of two opposites; unseasonably dry and hot on the east coast, with production declining, and ideal conditions on the west coast, with production increasing at a rapid rate.

Seasons such as this make it extremely difficult to forecast production. There are so many unknowns. How many hectares have had livestock turned onto them and will not be harvested? What area gets cut for fodder when the drought market is pushing hay prices higher and higher? How many hectares were sown dry and simply didn’t emerge due to lack of rain?

There is rarely consensus among the trade and industry organisations when it comes to estimating Australian production. I have heard barley production estimates approaching 9mt and as low as 7mt in recent weeks. Personally, I struggle to get above 8mt, with any decreases on the east coast currently being replaced by increased production in the west.

The scariest part of the domestic story is that we are still in winter and many parts of the east coast are already a write-off. As we know it is the spring that makes or breaks the Aussie crop. The most recent Bureau of Meteorology doesn’t provide any joy either, with both September and October likely to be drier than average across a majority of winter crop regions, including Western Australia.

While the USDA did decrease barley demand by 325,000mt to 145.6mt compared to their July report, it will still outstrip global production for the third consecutive year. It is down 2.5mt year-on-year, predominantly due to lower supply. The stocks to use ratio is now sitting at 12.5pc, compared to a far more comfortable 18pc only three years ago. More global rationing will be inevitable, but this is actually quite difficult when such a large proportion of world demand is quite inelastic.

Saudi Arabia is the world’s largest importer of barley. The Saudi Grains Organisation (SAGO), which has exclusive buying rights for feed barley into the kingdom, has issued two barley import tenders this season. They have bought 3.24mt, for arrival in the July to October period, which is around 250,000mt ahead of the same period in 2016-17. Despite the increased imports of corn, dried distillers’ grains (DDG’s) and other substitutes, total barley imports last season were 8mt and they are expected to remain the same in 2018-19. This will take out a substantial proportion of the Black Sea supply.

In the EU, the maltsters are facing some tough decisions due to low malting barley selection rates, predominantly a consequence of high protein. They either alter their specifications to alleviate all, or some, of the problems or they will be forced to import. But where will the imports be sourced? The Russian and Ukraine quality is too poor (and it is all going to Saudi Arabia as feed). Certainly not Australia, as any exportable surplus here (feed and malting) will go into China, Japan and other Asian consumers. That leaves Canada and Argentina as the likely candidates.

This scenario is one that will not be lost on the Australian maltsters and brewers, particularly on the east coast. We are already seeing a steady stream of coastal feed barley shipments from WA to Brisbane and Newcastle. No doubt a large proportion of the Queensland and NSW malting barley requirements will be forced to make the same journey.

Grain imports the key to satisfying east coast demand

Grain Brokers Australia > Weekly Wire

by Peter McMeekin

The United States Department of Agriculture (USDA) released their August World Agricultural Supply and Demand (WADSE) report late last week. The key futures indices certainly reflected the bearish report tone in last Friday’s trading session and that trend continued into the first trading session this week.

Nevertheless, there were plenty of surprises. The market certainly expected the corn and soybean yields to increase, but not by as much as they did, coming in at 178.4 bushels per acre (bu/ac) and 51.6 bu/ac respectively. If these yields come to fruition it will see the United States (US) harvest their third largest corn crop and their largest ever soybean crop. Great for global supply but not so great for the US farmer while Trump continues to raise the rhetoric and play the tit-for-tat trade tariff game with China.

As expected, the USDA has forecast a further decline in world wheat production for the 2018/19 season. On the back of five consecutive years of record global production, the USDA has pegged this season’s global wheat crop at 729.6 million metric tonnes (MMT). This is down almost 4 per cent from the 2017/18 record of 758MMT.

The surprise here was they only cut production by 6.7MMT. The EU number came in well above trade expectations at 137.5 MMT, down 7.5MMT from July and more than14MMT lower year on year. Like Australia, many parts of Europe have been unseasonably dry and hot with substantial production decreases reported in Germany, Bulgaria, Romania and Sweden, just to name a few.

Canada was left unchanged, at 32.5MMT, when the market expected a production cut. Ukraine was also unchanged at 25.5MMT, despite recent local estimates suggesting the crop was as low as 24.4MMT. The Russian crop was increased to 68MMT, down from 84.9MMT last year, but up to 2MMT above some of the most recent internal Russian estimates.

From an Australian point of view, the biggest surprise in the WADSE report was leaving production here at home unchanged at 22MMT. That puts this year’s Australian wheat crop higher than last year’s, with vast swathes of Queensland and New South Wales stuffed (technical term) and many parts of Victoria and South Australia experiencing less than ideal growing conditions.

Thank goodness that the Western Australian conditions are the complete antithesis to the eastern states, with recent production forecasts suggesting the wheat harvest there could exceed 10MMT. Total grain production in the state is forecast at around 15.5MMT and growing on the back of extremely timely in-crop rains and warmer than normal temperatures through the winter.

All that said, it is hard to see this season’s domestic wheat crop exceeding 18MMT. There is upside with a good spring but minimal on the east coast. A poor spring and it could easily be much lower.

So where does that place us from a domestic wheat demand viewpoint? The number is fine. More than enough to meet Australia’s food, feed and seed demand of around 10MMT. However, the proximity of the majority of the production to the primary demand points creates the challenge.

We are already seeing the evidence. By the end of August, seaborne imports of wheat and barley into the port of Brisbane from other states of Australia will exceed 400,000MT since October last year. The Brisbane and Darling Downs domestic feed markets are driving both wheat and barley prices across the entire country.

All the wheat and barley production in Queensland and New South Wales will be required domestically. With the crop deteriorating in those states every day, the exportable surplus in Victoria is shrinking quickly as it is the easiest grain to move into the demand points further north.

But even that will not be enough. The coastal vessels will be kept busy well into 2019 moving grain from South Australia and Western Australia to keep up with burgeoning east coast demand. Basically, the domestic grain consumers in Queensland and New South Wales must buy wheat (and barley) away from the export pathways to ensure that this domestic demand is met.

It is the function of grain prices right across this drought-scorched land to allocate the limited winter crop grain production in the most efficient manner possible. Substantial rain is required for a summer crop plant in Queensland and northern New South Wales so it may not be until the 2019 winter crop harvest that real production relief arrives and we see a relaxation of the localized domestic shortfalls.