MARKETS OUTLOOK

Crop weather scares receding

by John Buckley

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

76 | Milling and Grain

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 worlds 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 Canadas 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 USDAs 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 Chinas 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 whats 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 doesnt 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, its 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-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 years 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 worlds 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 $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 countrys Wheat Board has just come
out with a forecast of around 25m tonnes compared with 27.5m
from a recent USDA report, last years 29.3m and the previous
seasons record 37.5m tonnes. It will reduce Canadas 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. Canadas 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 Canadas 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 seasons
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% 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 Argentinas shrinking export role (from 12m four

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August 2015 | 77

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 years at some 94.5m for the three
main producers combined (97m).
Because exports last year were reined in at times (not least by
Russias imposition of an export duty from February onward),

both countries are starting with larger than expected stocks.

In Russias case, these may not be mostly in the governments
strategic stock, as originally planned, but they are stil 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 Russias (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 heat-wave
and other weather issues were threatening a lower European
crop. The collapsing euro during the Greek crisis didnt 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

78 | Milling and Grain

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 years 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 years 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, its true, might turn out a bit better
than USDAs 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 governments usage mandate and world
energy markets stay on the floor amid a bearish global macroeconomic 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 years
record 1,002m, according to the USDA. The lions 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, heatwaves 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.
Brazils 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 worlds
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 Chinas 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 worlds 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 todays 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 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 years 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 years 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 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 seasons 381m

80 | Milling and Grain

and the previous years 340m. Demand is not growing as fast,

however, resulting in global stocks rising yet again to a new
peak of almost 92m tonnes. Thats 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 years 8.94m but some analysts think thats
now a bit optimistic. Among the EUs 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 years 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 years 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 Australias crop from
3.4m to perhaps 3m. Global rapeseed crush is expected to
drop by about 3% - 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% of
world oilmeal supplies, rapeseed meal about 13% and sun meal
around 5%.
KEY FACTORS AHEAD - WHEAT
The size of Russias 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.
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 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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