Weekly Commentary Archives | Grain Brokers Australia

Drought and Russian export tax cloud Kazakh trade flows…

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This season’s winter crop harvest in Kazakhstan is all but complete, with a dry seedbed at planting followed by an abnormally warm and dry growing season and numerous dust storms culminating in lower-than-average yields but above-average grain quality in most regions.

As of October 22, Kazakh farmers had reportedly harvested 15.8 million hectares or 99.7 per cent of the forecast harvested area. The Ministry of Agriculture stated that 16.1 million metric tonnes of grains and pulses had been reaped with an average yield of 1.02 metric tonne per hectare.

In the October World Agricultural Supply and Demand Estimates, the USDA pegged Kazakhstan wheat production for the 2021/22 season at 12MMT, down from its September forecast of 12.5MMT. However, this is almost 16 per cent lower than the USDA’s 2020/21 wheat production figure of 14.256MMT. The harvested area is expected to end up at 12.7 million hectares, putting the average yield at around 0.94 metric tonne per hectare.

The season started poorly with an unusually low soil moisture profile, forcing producers to plant deeper than usual in many regions. This resulted in late and irregular emergence in many fields. High temperatures and low rainfall in June led to poor tillering, weak plants and abbreviated stem elongation.

While the result was much lower production year-on-year, 90 per cent of the harvested wheat made food-grade quality, up from 83 per cent last year. The volume of high protein wheat with gluten content exceeding 28 per cent amounted to 74 per cent, up significantly from 60 per cent in 2020.

The USDA pencilled in Kazakhstan barley production at 2.5MMT in this month’s WASDE update, unchanged from its September number but 31.7 per cent lower than 2020/21 output of 3.659MMT. The harvest area is forecast at 2.2 million hectares, putting yield at 1.14 metric tonne per hectare.

Like wheat, barley production was challenged by a poor soil moisture profile through most of the growing season, with late sown crops performing the best. The practice of “snow fixing” or piling snow in ridges along the high end of paddocks so that it melts and runs into freshly sown fields pushed yields as high as two metric tonne per hectare in some districts of the Akmola oblast in the north of the country.

Domestic consumption of wheat is estimated at 6.3MMT in the 2021/22 marketing year, up from 6.25MMT in 2020/21. Food, seed and industrial use are forecast to be unchanged year-on-year at 4.8MMT, with the balance of 1.5MMT going into the stockfeed sector, up from 1.45MMT last season.

On the barley front, total domestic consumption is forecast to be 2.1MMT. At 1.8MMT, the stockfeed sector is the primary consumer in Kazakhstan, in particular the poultry industry. An additional 0.3MMT goes toward food, seed and industrial uses, with malt production for the beer industry a key end-use.

Lower production means lower exports to ensure domestic demand is satisfied. The Kazakh government has resisted calls from the grain milling industry to introduce export duties on wheat in a bid to limit exports and take the heat out of domestic prices. Nevertheless, Russian imports will certainly be required to meet export forecasts.

According to the USDA, wheat exports will reach 7.4MMT in the 2021/22 marketing year, based on imports from Russia of 0.8MMT.  Much of these imports will come from Siberia, where the costs of shipping across the border into Kazakhstan are substantially lower than trucking to ports on the Black Sea or in the far east of the country.

However, the USDA export estimate is much higher than local government and the Foreign Agricultural Service forecasts of around 6.5MMT, both based on imports from Russia of around 1MMT. But that import number is overshadowed by the 2MMT estimate from leading agricultural consultancy firm Sovecon.

The introduction of the Russian export tax has undoubtedly increased the cross-border trade between Russia and Kazakhstan, but it has also led to widescale underreporting of grain movements. There is no requirement for trade within the Eurasian Economic Union (EAEU) to be inspected or weighed when transiting borders, and several Russian news agencies are saying wheat exports to Kazakhstan could exceed 4MMT this season. This led to a recent announcement of plans to inspect and weigh grain shipments transiting the Russia-Kazakhstan frontier.

Taking the USDA import number of 1MMT means that there is potentially an additional 3MMT of ‘tax-free’ Russian wheat that could be ‘unofficially’ exported out of Kazakhstan as whole grain or as flour to traditional trade partners in the region. Uzbekistan, whose own harvest was 8 per cent below the five-year average, is traditionally the nation’s biggest wheat export customer. It is forecast to import 3.5MMT in the current marketing year, up 20 per cent on the five-year average. They also mill Kazakh wheat for re-export to Afghanistan.

Afghanistan is usually the second-biggest customer, but despite government assurances, the clearing of financial transactions is a big concern under the recently established Taliban regime. Tajikistan and Iran, which we know has a higher-than-normal import requirement this year due to domestic drought, are other likely destinations.

China shares a 1,783 kilometre border with Kazakhstan and is a critical emerging market for Central Asia’s biggest grain producer. However, persistent Chinese limits on rail and truck transport at the Kazakhstan-China border and unilateral COVID-19 quarantine restrictions on incoming trade are frustrating the Kazakhstani government.

In August, Kazakhstan’s rail authority reportedly announced restrictions on accepting cargo bound for the Chinese border, except in containerized shipments through the new transhipment terminal at the Dostyk-Alashankou border crossing. This significantly increases export costs, not to mention the global shortage of containers for such purposes.

There is nothing like a drought, global pandemic, artificial trade barriers and an indignant neighbour to disrupt trade flows. While Kazakhstan will undoubtedly have enough wheat to meet its domestic requirements in the 2021/22 marketing year, the picture for grain imports and exports, in particular wheat, is opaque at best.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Mexican grain imports increasing, but so too is food inflation …

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Mexico has been on a big grain buying spree in recent weeks, booking up substantial volumes of wheat and corn out of the United States as the country continues to increase its grain imports and dependence on foreign countries to meet growing domestic demand.

In the week to September 30, Mexico purchased 801,400 metric tonne of corn from the US. Mexico was the biggest purchaser, securing almost 64 per cent of total US sales for that week. Wheat acquisitions for the same week were 89,100 metric tonne, with Mexico again the biggest customer with almost 27 per cent of total sales. Mexico also took top billing in the rice stakes, booking 38,200 metric tonne from the US, or 52 per cent of the week’s trades.

The strong purchasing pattern continued in the week to October 7, with the USDA reporting corn sales to Mexico at 790,20 metric tonne, or 76 per cent of the week’s reported US corn business. Wheat transactions were higher than the previous week at 127,800 metric tonne, second to the Philippines on the total US sales listing. Weekly US rice sales were 33,900 metric tonne, with Mexico scooping up 87 per cent or 29,600 metric tonne.

The United States is expected to remain the principal supplier of grains to Mexico in the 2021/22 marketing year due to logistical advantages and a long history of bilateral trade. That said, Mexico has expanded its sources in recent years as major producers actively seek to challenge Uncle Sam’s market dominance into its southern neighbour.

In a recent report from Mexico’s National Agricultural Council, it was revealed 65 per cent of the nation’s domestic wheat consumption in 2020 was imported compared to 55 per cent in 2006. Over the same 15-year period, the proportion of corn demand met by imports increased from 26 per cent to 37 per cent. For rice, the ratio rose from 70 per cent in 2006 to 83 per cent last year.

The increased imports come despite a concerted government incentivisation scheme to encourage small farmers to increase the production of basic grains such as wheat and rice. While these schemes are slowly having the desired outcome, the increase in output is much slower than the burgeoning demand.

In the September grain and feed update from the USDA’s Foreign Agricultural Service (FAS), Mexico’s wheat production was increased by 0.2 million metric tonne to 3.2MMT compared to their May estimate on the back of favourable seasonal conditions. This is 0.1MMT higher than the official USDA estimate and 0.235MMT, or 8 per cent higher than the 2020/21 crop. However, it is still 1MMT lower than the record crop of 4.2MMT in the 2008/09 season.

Wheat is deemed the second most essential cereal in the Mexican diet. It represents 40 per cent of total household expenditure on cereals and provides around 10 per cent of the total calories in the Mexican diet. Primarily driven by population growth, wheat demand for human, seed and industrial use is forecast to increase by 1.4 per cent to 7.1MMT in 2021/22 compared to the previous marketing year.

Demand for wheat from the stock feed sector is forecast to increase by 50 per cent to 300,000 metric tonne. While relatively small compared to the demand for human consumption, the increase does reflect a higher inclusion rate in animal rations, particularly for the pork sector, at the expense of corn.

Relatively low carry-in stocks and the higher demand has pushed projected wheat imports up to 5.1MMT, 8 per cent higher than in 2020/21, but still 5.3 per cent shy of the record 5.37MMT imported in 2016/17. At 3.46MMT, Mexico was the largest market for US wheat in the 2020/21 season, just ahead of China on 3.21MMT.

On the corn front, the September FAS update is calling 2021/22 production unchanged from its May report at a record 28MMT, up 1MMT on its previous 2021/22 estimate. However, the 2020/21 production number was revised higher by 0.2MMT to 27.2MMT based on more complete data from the Secretariat of Agriculture and Rural Development (SADER). The planted area is up 2.2 per cent to 7.3 million hectares.

Harvest of this year’s corn crop is ahead of average, with yields to date a bit better than expected, especially given the dry conditions in the Northern Plains this growing season. As of October 8, around 41 per cent of the crop had been harvested, compared to 29 per cent at the same time last year and a long-term average of 31 per cent.

The Mexican diet is heavily reliant on corn-based foods such as tortillas. Corn accounts for a significant proportion of the population’s daily caloric intake, a custom that emerged thousands of years ago. That is why corn is considered as much a food grain as it is a feed grain to Mexicans.

Domestic demand for corn is forecast at 44.2MMT in 2021/22, an increase of 0.5MMT compared to the previous corresponding period. The food consumption component is unchanged at 18.2MMT or 41 per cent of total demand. Feed demand makes up the balance at 26MMT, up 0.5MMT on the 2020/21 figure, matching the growth and bullish outlook for the stockfeed demand, particularly from the poultry sector.

This has pushed projected imports up to a new benchmark of 17MMT, 3 per cent or 0.5MMT higher year-on-year, with the trend expected to continue while production increases lag the demand curve. Mexico held the mantle as the globes biggest corn importer until usurped by China in the 2020/21 marketing year.

The current high priced commodity environment is great for the Mexican farmer, but the increased reliance on imports makes food inflation a massive challenge for the government. In September 2021 alone, the cost of food in Mexico increased by 8.8 per cent compared to September last year.

The price of tortillas is a significant economic barometer for the Mexican economy, and the high cost of imports has the government considering the relaxation of duties on imported corn. Such a move would go a long way toward appeasing unrest amongst the general population as the economy struggles to recover from the COVID-19 downturn.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Iranian wheat imports soar due to drought…

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Drought ravaged agricultural production has been an all-too-common theme across the northern hemisphere over the last twelve months. Unfortunately, Iran is another country to have fallen victim to well below average rainfall and extreme temperatures during its most recent winter crop cycle.

The largest country in the Middle East, Iran has a long history of agricultural production. It claims to have invented the windmill with the first ones used in the Sistan region of eastern Iran, bordering Afghanistan, possibly as early as the mid-seventh century.

Around one-third of Iran‘s land area is suited for agricultural production. However, because of poor soil and lack of adequate water distribution in many areas, most of it is not under cultivation. Only 12 per cent is planted to food crops, but less than one-third of the cultivated area is irrigated, the balance being devoted to dryland farming.

Wheat, rice, barley and corn are grown on 70 per cent of cultivated land, with wheat – the country’s main staple – accounting for more than half of total crop production. In the 2017/18 season, Iran was the world’s 13th largest wheat producer at 14.5 million metric tonne.

Iran’s winter crop harvest concluded in August with average in-crop precipitation down by 54 per cent compared with last year and 41 per cent compared with the long-time average. In addition, heatwave conditions significantly increased evaporation, the combined effect being substantially lower production.

According to Iran’s meteorological service, the months from October 2020 to mid-June 2021 were the driest in the past 53 years, and the average temperature in the country has increased by 2° Celsius since the late 1960s. Meanwhile, rainfall has decreased by as much as 20 per cent this century alone.

The Iranian government buys wheat from domestic farmers at a guaranteed price to build its strategic reserves and regulate the market. At the beginning of the crop cycle, the Agriculture Ministry forecast wheat production would reach 12MMT and government purchases at 10MMT. In July, total production was revised lower to 10MMT, with government purchases estimated to total 7.5MMT.

By mid-September, purchases from farmers had only reached 4.7MMT, and grower sales had slowed to a trickle. Assuming farmers retain 2.5MMT for their own use and ‘over the fence’ sales, that puts production at 7.2MMT, down almost 50 per cent year-on-year. Based on government data, Iranian farmers produced almost 14.5MMT of wheat in the Iranian calendar year 1398 (ended March 19, 2020) and just over 14MMT in 1399 (ended March 20, 2021).

Iranians are among the biggest consumers of bread in the world. There are around 350 operational flour mills in the country with a milling capacity of 24MMT per annum. Current milling consumption is around 12MMT per year, and total domestic consumption is reportedly around 12.5MMT. Interestingly, domestic demand projections in the latest USDA are much higher at 17.7MMT. I suspect that reality is somewhere around the midpoint after other uses such as seed retention, stockfeed requirements and additions to strategic reserves are built into the equation.

With a supply deficit comes imports. In July, Tehran was factoring in wheat imports of around 5MMT, but with lower production, that estimate was revised higher in August to a minimum of 6MMT. However, the harvest statistics suggest that imports of as much as 8MMT may be required before March next year to ensure domestic requirements are met, and the government has enough stock to regulate domestic prices. That would push Iran to fifth by volume on the list of global wheat importers in the 2021/22 marketing year behind Egypt, Indonesia, China and Turkey.

According to Iran’s Ports and Maritime Organisation, almost 2MMT of wheat had been discharged from 122 vessels in the first half of the year (March 21 to September 22). That is an average vessel size of just 16,400 metric tonne. This suggests that the Caspian Sea trade from Russian and Kazakhstan into the ports of Anzali, Noshahr and Amirabad has been quite active. Imports have reportedly jumped significantly in recent weeks, with as much as 1.8MMT expected to be discharged in October alone.

Barley output was also adversely impacted by the drought, with final production coming in at around 2.5MMT off 1.8 million hectares, well down on the early harvest expectations of 3.7MMT. According to the agriculture ministry, imports are generally around 3.2MMT each year to meet the country’s supply deficit, but that will need to be increased to more than 5.2MMT to meet domestic demand through to March next year.

While this year’s drought has slashed winter crop production, it has also exacerbated a number of agricultural production issues that have been building for many years due to the scarcity of water, soil salinity, increasing aridity, poor infrastructure and decades of under-investment.

Around 90 per cent of Iran’s total water consumption goes into agricultural production. Groundwater is the primary source, but there is a long history of inefficiency in its distribution network, particularly for the agricultural sector. The government has been promoting agriculture and allowing the digging of deep wells, but that has exhausted the available water resources and increased soil salinity.

According to official figures, Iran now has 192 dams, about ten times more than it had 40 years ago. However, in such an arid environment, evaporation rates are incredibly high, and water transportation infrastructure is poor, seriously compromising the efficacy of such investments due to low water use efficiency.

Environmental experts have stated that the current water shortage is also the result of a misplaced perception of agriculture development and progress. The government continues to be focused on short term solutions to maximise self-sufficiency, not least as a response to economic sanctions and pressure from abroad.

The drought aside, the future of agricultural production in Iran is at a crossroads. It remains hostage to recurrent volatility, such as drought, floods, locust infestations, earthquakes. The intense focus on dam construction and tapping the limited groundwater supplies for irrigated crops have exacerbated environmental issues such as salinity and desertification. And it has failed in its goal to improve agricultural self-sufficiency and food security.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

One person’s loss is another one’s gain…

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The extent of the winter crop damage and subsequent production loss on account of the devastating drought conditions throughout much of Canada this year is borne out in the latest Outlook for Principal Field Crops, released by Agriculture and Agri-Food Canada late in September.

The outlook incorporates Statistics Canada’s yield estimates that are based on a model featuring analysis of coarse resolution satellite data, agro-climatic data and limited field data. The washup is a forecast decrease of almost 30 per cent in total field crop production in 2021/22 compared to the previous season.

The decline for the Western Canadian provinces, where most of the country’s field crop output occurs, was even more dramatic, with production down 40 per cent year-on-year and 36 per cent below the five-year average. Partially offsetting the woes in the country’s west was a slight increase in Eastern Canada’s production compared to 2020/21 due to much more favourable climatic conditions. As at August 31, drought encompassed 94 per cent of Western Canada’s agricultural land. The September 30 update has not been released at the time of writing.

Canadian farmers planted 31.518 million hectares to all field crops in the current season, up slightly from 31.491 million hectares in the 2020/21 season. However, production plummeted from a record 99.75 million metric tonne last year to 70.384MMT for the harvest that is just winding up. That may be a big drop, but much of the local Canadian commentary suggests that the cuts were not nearly deep enough considering the poor season. Historical data reveals this is the largest year-on-year percentage drop seen since 1961 when total production dropped 38.2 per cent.

Yield across all field crops dropped from an average of 3.27 metric tonne per hectare to 2.33 metric tonne per hectare. Nevertheless, the particularly interesting statistic was the proportion of abandonment which only rose from 1.0 million hectares to 1.32 million hectares, a surprisingly minor jump for such a disastrous production season.

The coarse resolution based modelling adopted for the September report relies on historical averages for the harvested area, which is a shortcoming of the methodology in a season such as that experienced by Canadian farmers in 2021. It means that most of the reported production loss has been due to lower yields, leaving the production door ajar for further falls when a reality check is made of the satellite analysis before the November update.

Looking at the data at a commodity level, we find that total wheat production is estimated at 21.715MMT, down more than 38 per cent from Canada’s second-biggest ever harvest of 35.183MMT last year. This will be the smallest wheat crop since the 2007/08 marketing year. Accordingly, wheat export forecasts have fallen dramatically from 26.407MMT in 2020/21 to 15.6MMT in the current marketing year, according to the AACF report. This compares to the latest USDA forecast of 17MMT, but they do have higher production at 23MMT.

Canada is the world’s largest producer of durum wheat, and total production of 3.545MMT is included in the total wheat production figure. This is down 46 per cent on last year’s harvest. Yields have dropped a mammoth 77 per cent year-on-year from 2.86 metric tonne per hectare to 1.62MT/ha. With tight carry-in stocks, total supply has dropped 41 per cent from 6.946mMT to 4.322MMT, the fifth-lowest on record.

The supply tightness out of Canada has pushed European Union durum consumers to Australia, with the potential for much more business once the current crop is harvested. Canadian durum exports to the EU from July 1 to September 19 totalled just 170,100 metric tonne, down from 485,000 in the first 12 weeks of 2020/21. In the same period, Australian exports of durum wheat to the EU went from zero last year to 65,000 metric tonne this year.

The EU imported 2.92MMT of durum wheat last year, with Canada supplying 2.03MMT, around 35 per cent of total exports and almost 70 per cent of EU import demand. With the lower supply in Canada comes lower exports, which are expected to drop from 5.773MMT in 2020/21 to 3.1MMT in the 2021/22 marketing year. While Australian exports can’t fill the entire gap, it will be impossible for Canada to export the same quantity to the EU this season.

Barley production is estimated at 7.141MMT, the smallest harvest since 1968. This is down 33.5 per cent from last year’s harvest of 10.741MMT. This is despite a 7.8 per cent increase in the harvested area from 2.809 million hectares to 3.029 million hectares. It will put a severe dent in exports, which are expected to fall by more than 55 per cent from 4.572MMT last season to just 2.050MMT in the current marketing year.

Consumers are not only faced with lower production out of Canada but serious quality issues as well. The average protein level in this year’s barley crop is around 14 per cent, creating a giant headache for brewers. High protein malt creates challenges such as low extract levels, haze formation in beer and reduced shelf life of the packaged product.

Canada’s canola crop has not been spared! Canada is the world’s biggest producer and exporter of canola, but the drought conditions have cut expected production by 34.4 per cent from 19.485MMT last harvest to 12.782MMT this year. Export expectations have plummeted accordingly, down 36.2 per cent from 23.042MMT to 14.699MMT.

This production hiccup comes at a time when global demand is increasing with the push to reduce greenhouse gas emissions under the Paris Agreement. According to a recent Rabobank report, “government initiatives to curb emissions in the northern hemisphere will fundamentally change, and be the key drivers of, the global canola market”.

The increased demand and the lower production out of Canada saw new crop Australian canola trade above the AU$1,000 per metric tonne mark for the first time ever last Thursday. Unheralded prices in a season where Australian production is expected to be a record is a huge bonanza for domestic growers. Not to mention the potential kick for next year’s planting intentions, which will no doubt be replicated in Canada, weather permitting.

It has definitely been a year to forget for most Canadian grain farmers. Hopefully, with harvest still ahead of us, it will be one to remember for most Australian grain farmers. We certainly wish no ill will upon our Canadian cousins, but as the saying goes: one person’s loss is another one’s gain.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Pakistan overachieving in the wheat import space…

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Pakistan wheat tenders have been a regular occurrence in recent months, but the government’s international procurement campaign has gone up a notch in September, despite the country’s farmers harvesting a record crop earlier in the year.

Wheat is one of Pakistan’s four main agricultural crops and is the largest crop by area, taking up around 40 per cent of the country’s total cultivated land. The other main crops are rice, cotton and sugarcane. Wheat is grown in the ‘Rabi’ or winter season, with planting in the October to December period and harvest from March through to late May.

The area planted to wheat late last year increased by 4.2 per cent to 9.2 million hectares compared to 2019, and weather conditions throughout the growing season were generally favourable. In crop fertiliser applications were higher than usual, with urea sales increasing 17 per cent year-on-year. Damage due to disease was relatively limited, and there were no reports of locusts. As a result, production increased by 9.6 per cent from 24.9 million metric tonne to a record 27.3 million metric tonne.

Around 60 per cent of the wheat produced is retained by farmers for their household consumption and seed for the next crop. The government buys 23-25 per cent of the crop, with private traders lifting the rest of the output. The government increased the wheat support price for this year’s production to 1800 rupees per 40-kilogram bag (US$271 per metric tonne) from 1400 rupees per bag (US$209 per metric tonne) last year.

The Pakistan government has approved the import of up to three million tonnes of duty-free wheat during the 2021-22 marketing year to fill the gap between production and consumption. The latest USDA forecast has them pencilled in for 2.5 million metric tonne after more than 3.6 million metric tonne was imported in the previous year.

The government also plans to increase domestic reserves to four million metric tonne in the current year in a bid to contain inflationary pressure caused by higher domestic prices. However, the government import program has failed to curb the alarming rise in the domestic price of wheat flour. Ramping up imports in a high global price environment and when the rupee is losing ground against the US dollar has compounded the issue.

Wheat prices in Pakistan have been relatively high since 2020 due to elevated production costs and lower-than-expected production years from 2018 to 2020, which tightened domestic supply. The country prioritised the accumulation and maintenance of a large wheat reserve after a spike in demand following the COVID-19 pandemic, and the threat of a locust plague last year raised internal wheat values.

Wheat flour is a staple in the Pakistan diet but hoarding and then profiteering from the resultant supply disruptions has been a market issue for years. The buffer stocks will be used to limit shortages of wheat and wheat flour in the domestic market by smoothing out supply to domestic millers and consumers when stocks tighten.

Another challenge for Pakistan has been the export of wheat by private traders and dishonest merchants who, in turn, profit from the tighter domestic supply outcome. It has forced the government to increase imports to meet demand and keep prices and inflation in check. Exports spiked to almost two million metric tonne in 2018/19 but have been much lower in recent years. However, Pakistan was a notable exporter following their harvest earlier this year.

The Trading Corporation of Pakistan (TCP) issued a tender mid-way through last week to purchase 640,000 metric tonne of wheat for January and February 2022 shipment. Offers are sought in a minimum of 100,000 metric tonne consignments from optional origins, and the deadline for submissions to the tender is September 29. As is the custom with most international tenders, the TCP reserves the right to purchase more or less than the specified tender volume.

Offers for the previous tender of 500,000 metric tonne November 11 to December 30 shipment only closed on Monday of last week. Reports emerged at week’s end that the TCP had purchased 575,000 metric tonne, exercising their right to buy more than the tender quantity.

The price is believed to be US$383.50, including cost and freight (C&F), after several global exporters agreed to match the lowest price offered in the first round of the tender. Trading houses Cargill, Agrocorp, Falconbridge and CHS are understood to have been the successful sellers.

The previous tender for 550,000 metric tonne for October 1 to November 30 shipment had closed just ten days earlier on September 10. Reports suggest that the TCP settled on 405,000 metric tonne of optional origin wheat at US$369.50 C&F with Cargill and CHS the victorious tender participants.

The irony of the situation for Pakistan is that its eastern neighbour, India, is an active wheat exporter this year. While India is exporting to other countries in the Indian Ocean rim and southeast Asia, Pakistan is spending large sums to import from the world’s major exporters at prices far higher than India is offering to other countries in the region.

Article 370, which relates to the autonomy for the Jammu and Kashmir regions, is the sticking point. The Economic Coordination Committee (ECC) is responsible for the country’s economic security. In April of this year, the Pakistan cabinet overturned an ECC decision to allow imports of agricultural commodities from India “until article 370 is restored” by India.

The spate of large wheat tenders by the TCP in September put Pakistan on track to surpass both the USDA import estimate and ECC’s duty-free import threshold. The overt nature of Pakistan’s import program is an apparent attempt to appease its people, instead of addressing the ground realities relating to inventories at mills and warehouses, better domestic pricing mechanisms and the ongoing hoarding and profiteering by stakeholders. Not to mention the precious foreign reserves being eaten up by such an expansive import program.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Russian harvest winding down as the planting program accelerates…

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A high level of conjecture remains around the final size of this year’s wheat harvest in Russia, with some widely varying forecasts released in recent weeks. Dry weather throughout the growing season has had a dramatic impact on yields following record production last year.

Last Thursday Russian agricultural consultancy IKAR reduced its 2021/22 season wheat crop forecast to 74-75 million metric tonne. Lower than expected yields in several regions compelled IKAR to revise its August crop forecast of 77MMT. IKAR singled out the country’s Central, Volga and Ural regions as the worst hit by below-average rainfall that has seen production plummet from 85.9MMT in 2020.

IKAR pegged the Russian barley harvest in the 17.5-18MMT range suggesting their production bias for barley was also lower after forecasting an 18MMT crop last month. The consultancy’s corn production forecast is 14-14.5MMT, with total Russian grain output expected to fall in the 117.5-120MMT range. Russian grain exports will be 39.5-40.5MMT, including 31-31.5MMt of wheat, according to IKAR.

Leading consultancy and Black Sea market analyst Sovecon has Russian wheat production slightly higher than IKAR at 75.4MMT. At 33.9MMT, its wheat export estimate is also higher, although the export tax continues to play havoc with Russia competitiveness into some traditional high volume markets. As a result, Sovecon expects an extended export program, stretching well into the second half of the 2021/22 marketing year, which commenced on July 1.

The USDA is setting the low mark this year with its current wheat production forecast at 72.5MMT, 15 per cent lower than its final 2020/21 output of 85.35MMT. The USDA has exports at 35MMT, which seems high considering domestic consumption is around 40MMT. This pushes ending stocks down to just under 10MMT, but still slightly higher than the average of the last four years at 9.75MMT.

At the high end of wheat production estimates is the Russian Grain Union. It has reportedly raised its harvest forecast last week from 76MMT to 78-78.5MMT, indicating the yield gap compared to last season was not as high as expected. It expects more favourable production outcomes as the harvest moves into the Siberian spring wheat regions, contrary to market reports suggesting additional abandonment of spring wheat areas due to meagre yields.

As a result of the production upgrade, RGU is now calling wheat exports for the 2021/22 marketing year in the 35.5-36MMT range, higher than its previous forecast of 34MMT. The Union has the total Russian crop pegged at 119.5MMT, up from 118MMT in its last update.

The Russian winter and spring crop harvests are now around 90 per cent complete, with around 24.4 million hectares covered thus far. The Russian Ag Ministry says there is 97.2MMT of grain in the bin, including 70.7MMT of wheat and 17.3MMT of barley.

According to Russian Federation Customs Service Statistics, wheat exports in the first seven months of 2021 were 14.1MMT, down 6.2 per cent year-on-year. However, the value of those exports rose by 12.3 per cent to US$3.6 billion, a reflection of the higher global grain values in 2021.

In July, the first month of the new marketing year, Russia exported 1.8MMT of wheat, down 20.9 per cent year-on-year and down 20.7 per cent compared to June. This highlights the impact of the export tax on shipments in June, as the trade scrambled to move as much wheat as possible before the new tax formula came into effect in July.

Meanwhile, Russian farmers are expected to plant less winter wheat this year as the autumn planting program ramps up. A record area was planted last year, but below-average rainfall thus far, displeasure with the current export tax regime and a switch to oilseeds are all contributing to the decrease, according to local reports.

Additionally, extensive replanting of failed winter cropping areas in Central and Volgograd regions with spring wheat varieties means the harvest of these paddocks will be much later than normal. That makes it highly unlikely that they will all get harvested and then replanted for the new crop campaign before the winter sets in, halting field activity.

Russian farmers prefer to plant winter wheat over spring wheat as it is much higher yielding and is generally less susceptible to adverse summer weather. Accordingly, winter wheat typically makes up around 70 per cent of the total area planted to wheat. That said, winter wheat is not suited to the Urals and Siberia as the winters are long and extreme, and the growing season is extremely short.

While recent rains have improved the seeding outlook, the winter planting program is still lagging last year’s pace. As of September 14, around 7.8 million hectares had been sown to winter crop compared to 8.2 million hectares at the same time in 2020.

Sovecon is calling the new crop winter wheat area lower by as much as 1 million hectares, down 5.6 per cent compared to the 17.8 million hectares planted in 2020. IKAR is a little more conservative, calling the area reduction only 0.5 million hectares.

The counterargument here is solid farm profitability. Much to the chagrin of Moscow, higher global wheat prices have countered the effect of the export tax on farm gate wheat values. This means that returns for most farm businesses remain quite buoyant relative to recent seasons. While farmers will plant some of their crop dry, it will more likely be a lack of soil moisture rather than the export tax that has the greatest influence on the final wheat area this year.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

No fireworks from the USDA this month…

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The United States Department of Agriculture updated their global supply and demand estimates last Friday. The knife wielded upon wheat production forecasts in August returned to its scabbard for the time being. It appears that most of the ambiguity around worldwide wheat production in the 2021/2 season is now in the rear-view mirror, with output rebounding slightly compared to last month’s report.

The World Agricultural Supply and Demand Estimates report pegged global wheat production for the 2021/22 marketing year at 780.3 million metric tonne, 3.4MMT higher than the August number. Production amongst the world’s major exporters was 0.4MMT higher than last month’s forecast at 319MMT.

The USDA couldn’t quite grasp an Australian wheat crop as high as the Australian Bureau of Agriculture and Resource Economics and Sciences suggested in its latest crop report. The USDA came in at 31.5MMT, 1.5MMT higher month-on-month, but still 1.1MMT lower than ABARES forecast of 32.6MMT. Maybe it was the uncharacteristic 4.8MT hike in the ABARES forecast compared to June that spooked the USDA number crunchers. In addition, Australian exports only captured two-thirds of the USDA production increase, rising 1MMT to 23MMT.

One Australian number that the USDA consistently underestimates is domestic demand. It may have increased by 0.2MMT in last week’s report, but at 8.2MMT, it is at least 10 per cent shy of most domestic projections. Milling demand is rising, cattle on feed numbers have not dropped below one million head all year, despite forecasts to the contrary, and demand from the poultry sector is quite robust.

The Canadian wheat production estimate was trimmed by 1MMT to 23MMT, putting the USDA in line with the first forecast from Statistic Canada of 22.9MT. Export projections have taken a hiding due to the drought, with another 0.5MMT shaved off the August estimate to land on 17MMT last week. The big change to the Canadian balance sheet was a 1.9MMT hike in 2021/22 opening stocks after Statistics Canada reported higher than expected stocks.

Some very welcome rains have fallen across much of Argentina’s winter crop area in recent weeks, stabilising the production outlook after a dry winter threatened crop prospects. That said, the USDA did reduce its production estimate by 0.5MMT to sit at 20MMT. That compares to the Buenos Aires Grain Exchange forecast of 19MMT and the Rosario Grains Exchange on 20.5MMT.

On the European continent, Russian production was unchanged at 72.5MMT, as was Ukraine at 33MMT, but European Union wheat output was increased 0.4MMT to 139MT. On the export front, forecasts for each jurisdiction were untouched at 35MMT, 23.5MT and 35MMT, respectively.

Elsewhere, Indian production was increased by 1.5MMT to a record 109.5MMT. With domestic consumption unchanged at 105MMT, exports caught 80 per cent of the output increase, rising 1.2MMT to 3.5MMT. However, that is well short of the 6.8MMT sold in 2012/13, the country’s biggest export year. It was interesting to see India pop up with a sale to the Philippines last week, and the trade will be curious to see if they feature again in the coming months.

Amongst the major importers, the only mover was China, with the USDA increasing production by 0.9MMT compared to August to a record 136.9MMT. Domestic Chinese consumption was increased by 1MMT to 149MMT, all in the stockfeed column. The excess of demand over supply is made up of 10MMT of imports, unchanged month-on-month, and a decrease in the projected carry-out.

The other eagerly awaited numbers from last week’s WASDE report were the row crop projections for the coming United States harvest. The trade expected a corn yield of around 11.02 metric tonne per hectare (175.6 bushels per acre), but the USDA printed a higher estimate of 11.06MT/ha (176.3bu/ac).

However, the more important corn number was the planted area, up only 243,000 hectares to 37.76 million hectares, against market expectations of around double that number. The washup of the yield and area changes was an increase in US production of 6.3MMT to 380.9MMT.

The other change of note for the US corn balance sheet, and quite a surprise to the market, was a 1.9MMT hike in 2021/22 exports. The main beneficiaries appear to be Mexico, up 0.5MMT despite expectations of record production of 28MMT, and Canada up 1MMT as the effects of the ongoing drought flow through to corn production.

On the China front, favourable season conditions have pushed production 5MMT higher to a record 273MMT in 2021/22. The USDA also added 4MMT to the carry-in number after decreasing 2020/21 domestic consumption by the same amount. Add the lack of engagement between China and US exporters, and there is starting to be slight downward pressure on the Chinese import number, which was left unchanged at 26MMT.

On the soybean front, the US yield forecast exceeded market expectations, increasing from 3.36MT/ha (50bu/ac) to 3.4MT/ha (50.6bu/ac) against an average trade estimate of 3.38MT/ha (50.3bu/ac). However, much of the yield increase was negated by a 162,000 hectare decrease in the planted area to 35.3 million hectares. Consequently, US production and exports increased by 1MMT, basically accounting for the entire change in the global output and trade forecasts for the 2021/22 season.

One interesting change was a hike in Chinese imports for the 2020/21 season to 99MMT, apparently a reaction to some higher than expected August import data from Chinese customs. No change was made to domestic crush or feed consumption, so it all ended up in the carry-out column. With production, imports and domestic consumption unchanged in the 2021/22 season, the 2MMT tweak has been carried all the way through to 2021/22 carry-out.

All in all, the USDA produced a relatively benign WASDE report, a sharp contrast to the fireworks that followed last month’s iteration. The neutral tone triggered some profit-taking, especially in wheat which touched a seven-week low in futures trade. Despite the rally in corn and soybeans post report, the three major commodities all finished down for the week. It seems the market will tread water for now as it searches for the next game-changing story.

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Egypt buys but Russia misses the prize…

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Egypt’s state grains buyer, the General Authority for Supply Commodities (GASC), announced the results of its latest wheat tender early last week and yet again, Russian origin remained too expensive to participate.

GASC sought an unspecified quantity of soft and/or milling wheat in 55-60,000 metric tonne bottoms from global exporters for shipment in the October 15 to October 25 window and payment by 180-day letter of credit. Eligible origins were listed as the United States, Canada, Australia, France, Germany, Poland, Argentina, Russia, Kazakhstan, Ukraine, Romania, Bulgaria, Hungary, Paraguay and Serbia.

Following the close of tenders at noon local time last Monday, GASC announced that it had purchased 180,000 metric tonne (mt); 120,000mt from Romania and 60,000mt from Ukraine. The three successful offers were:

  • 60,000mt Romanian wheat at US$308.50/mt free on board (FOB) plus US$29.60/mt ocean freight totalling US$338.10/mt cost & freight (C&F);
  • 60,000mt Ukrainian wheat at US$304.25/mt plus US$36.08/mt freight, totalling US$340.33/mt C&F;
  • 60,000mt Romanian wheat at US$308.50/mt plus US$34.43/mt freight, totalling US$342.93/mt C&F.

These purchases mirror the quantities and origins in GASC’s previous tender for October 5 to October 15 shipment with the same payment terms. Those results were announced on August 18, with the successful offers being:

  • 60,000mt Romanian wheat at US$294.99/mt FOB plus US$34.43/mt freight for a total of US$329.42/mt C&F;
  • 60,000mt Romanian wheat at US$297.00/mt FOB plus US$34.43/mt freight for a total of US$331.43/mt C&F;
  • 60,000mt Ukrainian wheat at US$297.95/mt FOB plus US$35.94/mt freight for a total of US$333.89/mt C&F.

And just two weeks earlier again, GASC purchased one 60,000mt cargo of Romanian wheat at US$261.49/mt FOB plus ocean freight of US$32.25/mt, giving a landed price of US$293.74/mt C&F.

Egypt is the world’s largest buyer of wheat, making their purchase price quite an accurate and fascinating barometer of changes in global export values. In the three tenders in August, the average FOB price rose by US$45.59/mt, or 17.4 per cent. The average cost of ocean freight from western Black Sea ports to Egypt increased by 3.5 per cent, or to US33.37/mt, although it did fall 4.5 per cent, or US$1.56/mt, between the second and third tenders.

This puts the rise in Egyptian C&F wheat values across August at a staggering US$46.71/mt or 15.9 per cent. The surge comes at a time when prices are traditionally burdened by the weight of new crop supply from the northern hemisphere harvest. However, poor harvests in Russia, Canada, the United States and France have tightened global supply considerably, especially in the higher protein milling wheat category.

The fascinating point here is despite the significant rise in GASC tender prices, Russian origin wheat is still well out of the money. In fact, it was more than US$12/mt away from the cheapest tender price on a FOB for FOB basis, with the lowest Russian offers reported to be US$315/mt & US$317.90/mt FOB. With freight of US$35.75/mt, the Russian C&F price averaged US$352.20/mt, US$11.75/mt, or 3.5 per cent higher than the average buying price in the tender.

Another curious outcome of the tender was Ukraine seriously discounting its single successful offer. At US$353.25/mt, its second-best offer was US$12.92/mt more expensive than their lowest and was US$2.50/mt more than the cheapest Russian origin offer. Ukraine already has an extensive export program on its books and has plenty of options for its quality wheat, so it is unlikely they will need to be as aggressive in future GASC tenders.

French origin wheat was even further away at US$368.10/mt C&F. Their FOB price of US$315.85/mt was very similar to that of Russia, but freight is the killer for French wheat exporters. At US$52.25/mt, it is US$16.50/mt, or 46.2 per cent more than the cost out of Russia and US$24.35/mt, or 82.3 per cent higher than the cheapest Romanian offer. With a freight disadvantage of that scale, it is hard to see French wheat winning much GASC business this season.

Russian wheat export prices rose for the seventh consecutive week last week, with farmers holding tight in a rising market and exporters eager to buy ahead of another increase in the floating export tax. Russia launched its formula-based duty for grain exports back in June as part of government measures to stabilise domestic food inflation. The switch to a formula means the tax automatically rises in response to any price increases and is currently set at 70 per cent of the difference between a government/market determined base price and US$200/mt.

The tax started at US$28.10/mt in the week commencing June 2, and last week Moscow announced that the tax for the week beginning September 8 had been set at US$46.50/mt. That is an increase of 65.5 per cent since inception and reflects the rise in Russian export values over that time.

Russian consultancy Sovecon shaved another 0.8 million metric tonne (MMT) off its Russian production forecast last week to stand at 75.4MMT. This followed a 5.9MMT downward revision to 76.4MMT in the second week of August. The Ural and Volga regions of the country suffered greatly due to a dry and scorching summer, according to Sovecon. The Urals may harvest their lowest crop since 2012 and the Volga since 2014. Both regions only received between 50 and 80 per cent of average rainfall over the last three months, and temperatures were 3-5° Celsius above average.

Sovecon also cut its forecast for Russian wheat exports in the 2021/22 marketing year by 3.2MMT to 33.9MMT, the lowest since 2016/17. This was on the back of lower production, slow shipments and stiff competition from fellow Black Sea exporters such as Ukraine and Romania. Russian wheat exports are reported to be around 3.1MMT last month, 20 per cent lower than the August average for the past three years.

The export tax uncertainty puts Russia out of the GASC game for the time being. France is eliminated on account of freight, and Ukraine doesn’t need to discount to find homes for its exportable surplus in a season when its primary European competitors have had a poor harvest. The question is: how long can Romania continue to carry the can?

Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

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