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Commodities - MARKETS OUTLOOK
Commodities - MARKETS OUTLOOK
by John Buckley
Like maize,
soyabeans the main
cost-driver for the
meal markets - have
also experienced
some tightening up of
their old crop supply
balance this month.
The main factor has
been flooding in
Argentina just as the
crop nears or reaches
harvest, leading to
predictions of crop
losses of three to five
million tonnes.
Grain & feed markets have been volatile in the past month, futures prices initially rising sharply on
outside buying, then dropping back again under the weight of more bearish supply news - with the
notable exception of soya.
The outside influences were speculative funds looking for fresh investment opportunities amid
disappointment with returns from stock markets. Their revived interest in raw materials was also
encouraged by signs that the global economy might finally be working through the worst of the
recession as crude oil rallied further off its recent 12-year lows and other industrials like metals
also saw a mini-revival.
Grain and oilseed markets joined the fray when the funds, long used to selling grain futures short
(i.e. betting on further price falls) decided they might have overdone that strategy and embarked on
a large covering buying spree.
Weather fuelled uncertainty in the Americas
In the US maize market, the funds even went net long (backing price rises) as some crop weather
events suggested supply might significantly underperform forecasts. The funds had already been
long soyabean futures for a while, despite the huge surpluses overhanging this market.
Fundamental support for maize was linked mainly to hot dry weather in Brazil, threatening to lop
several million tonnes off the countrys second or Safrinha corn crop. Some analysts said this could
reduce export availability by as much as 5million to 10million tonnes. Until this month, the USDA
had been forecasting Brazils corn exports would rise in the 2015/16 season (which ends August
31) by about 15.5million tonnes, to a new record 37.5million. That would effectively replace this
seasons reduced maize crops in Ukraine, Europe and South Africa as well as taking some market
share away from the top supplier, the USA.
Incessant rain was meanwhile plaguing the Argentine soyabean harvest, threatening to reduce a
near record 59million tonne crop by 3million to 5million tonnes and possibly spoiling quality of
some of the rest.
In North America, traders were also starting to get edgy about spells of rain interrupting US sowing
of 2016 maize and soyabean crops. Maize planting had actually got off to a flying start and is
slightly ahead of the long-term average 60-70 percent done as we go to press. But with rain still
causing problems in some key areas, there remains a risk of sowing falling behind and maybe
not meeting the higher acreage forecast by the USDA for this year. Soyabeans have more time
to get sown in the optimum window so could actually end up benefitting from any spare acreage
abandoned by maize planters.
If rains do linger on, this could become a more significant factor supporting maize prices and
perhaps weighing down on soya.
The combined effect of the American weather stories and fund buying was to push up the
bellwether Chicago
maize futures market
in late April to a
nine-month high of
over $4/bushel (about
$158/tonne) - almost
16 percent over its
early April low. Since
then, however, the
price has come all
the way back down
to the US$3.60s.
million), the rest spread over most of the regular maize consuming
countries.
None of this is really that supportive of higher maize prices going
forward. The CBOT futures markets forward prices suggest that by
the spring of 2017, corn will be worth about 6% more than it is now
but this is really little more than a carrying premium to pay for
storage. Futures arent always right but its interesting to note that if
we look back to May 2015, they were pointing to maize at about $4
per bushel a year hence close to the recent high mentioned above.
While maize and soyabean fund buyers have recently been able to
justify some risk premium on prices from weather upsets, wheats
inclusion in the fund purchasing spree has seemed less logical,
more case of this market going along for the ride while the investor
mood lasts.
At one point recently, the CBOT wheat futures front month did get
as high as US$5.10/bu (about US$187/tonne) which was its best
since early November last year. Subsequently it has come back
down to the US$4.40s ($186/t). The European milling wheat futures
contract achieved more modest gains, the last current crop month
firming up to 157 before sliding back recently to about 147/
tonne, where it expired this month.
EU milling futures market
The first position quoted on the EU milling futures market now is
new-crop September which has been trading in the low 160s/
tonne. Going forward, the price rises to about 178 by September
2017 and 183 for the 2018 crop. So futures point to milling wheat
being about 11 percent more expensive next autumn and 14 percent
up the year after that (i.e about 20 percent over the recently-expired
old crop price).
While 2018 price forecasts, for crops not even sown yet, are highly
speculative, the case for some wheat price premium going forward
might be made on a couple of factors. One is that the EU will
probably reap a smaller crop this year (but not that much smaller
than last years record one). The other is the need to get the price up
from the current red-line level to one at which farmers can afford
to grow the crop.
Looking at the broader global supply context for wheat, new crop
(2016/17) production is currently forecast by both the UN Food &
Agriculture Organisation and the IGC about 4million tonnes higher
than last month at about 717million tonnes about 2.2 percent
down on the year.
The IGC sees consumption down from 719 to 715million tonnes
but the FAO has it more or less unchanged, food use rising slightly
to offset a small drop in feed consumption. Overall, this still leaves
wheat stocks at a burdensome 218m tonnes according to the IGC or
195million in the FAO data. The latter is down by about 8million
tonnes on the year which is not really enough of a fall to turn this
market around.
The newly minted USDA forecasts for wheat are even less
supportive, envisaging a mere one percent fall in world production
in 2016/17, or about seven million tonnes from last years record
734million (which was also raised by about 3million tonnes from
USDAs April estimate).
Declines in 2016/17 wheat output are seen mainly in Europe (-3.5m
tonnes), Turkey (-2 million), Ukraine (-3.2 million), the US (-1.4
million) and smaller producers (a combined 5.5m tonnes). These
are partly offset by gains in countries including Argentina (+3.2
million) and Russia (+2 million).
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10/02/2015 17:30