Weekly Commentary Archives | Grain Brokers Australia

Northern hemisphere harvest commences amid a cloudy demand outlook…

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The northern hemisphere winter crop harvest is underway amid escalating fears that a second wave of COVID-19 infections, particularly in the United States and Brazil, will lead to new lockdowns, lower global grain demand and exacerbate the enormous economic impact of the worldwide pandemic.

Wheat futures were punished with technical liquidation and abundant global inventories pressing all three US wheat bourses – Chicago, Kansas and Minneapolis – to new contract lows in last Friday’s session. Trade on the day was highlighted by the absence of substantive buying interest on both the domestic and export front.

Matif milling wheat futures also slipped to a three-month low on Friday. Still, they may find support this week after the European Commission further reduced its forecast for this season’s European Union soft wheat harvest by 4.3 million metric tonne (MMT) to 117.2MMT.

This estimate excludes the United Kingdom, and if their wheat crop is 10MMT, plus an EU durum harvest of 7.4MMT, the combined total is well below the USDA’s June estimate of 141MMT for the EU27 + UK. However, many in the trade see the Commission forecast as far too low with crop conditions improving in Germany, central Europe and the Baltic States throughout June.

Last Monday the USDA pegged the US winter wheat harvest at 29 per cent completed, and that number jumped sharply to 41 per cent in this week’s report after 7 days of favourable harvesting weather. The winter wheat conditions were reported at 52 per cent good-to-excellent, slightly higher than a week earlier.

The surprise in last week’s numbers was the deterioration in the condition of the US spring wheat crop, falling six percentage points to 75 per cent good-to-excellent. Despite beneficial weather across the northern plains that number fell a further 6 points to 69 per cent in the latest crop progress update released on Monday (US time).

In Europe, the French wheat harvest is picking up in the south, but there are fears of fusarium developing in the northern areas following recent rains. Initial cuts in the south-west are showing good protein and test weights, but yields are well below the exceptional levels seen last year. France AgriMer estimated that 56 per cent of the country’s wheat crop was in good-to-excellent condition, unchanged from a week earlier.

The French barley harvest is fractionally further advanced with early yields and test weights generally good, and certainly better than the very dry spring conditions indicated. France AgriMer rated the winter and spring barley crop conditions as 51 and 54 per cent good-to-excellent respectively.

Harvest in the Black Sea region has finally commenced after low temperatures, and some wet weather in late May and early June delayed ripening of the crop. The market is eagerly awaiting early winter crop yield trends as this will set the tone for global export values over the next few months.

The Stavropol region in the south of Russia is a key export producing region. The winter crop harvest is reported to be around 9 per cent complete, predominantly barley at this early stage. Anecdotal reports put early yields down around 40 per cent compared to last year but cannot be considered representative of all crops in the region at this early stage of harvest.

Further east in Krasnodar, Russia’s second-biggest wheat-producing region, early barley yields are down year-on-year but are broadly in line with local trade expectations. This bodes well for wheat production as it was sown later and is not expected to have been as severely impacted by frosts and the early spring dryness.

Spring wheat crops in Russia and Kazakhstan still have at least six weeks to go before they are out of jail. It has been relatively dry throughout June but the chances of rainfall over the next few weeks has improved. However, despite record temperatures in parts of northern Siberia last week, the spring wheat regions remain abnormally cool.

The Ukraine harvest is lagging last year’s early pace but has commenced ahead of the five-year average. Around 125,000 metric tonne was in the bin as of late last week. Again, this is predominantly barley, and early yields are poor, averaging about 3 metric tonne per hectare, but higher numbers are anticipated as the harvest accelerates.

The size of the Russian crop is the pressing question. The Russian Agriculture Ministry has it pegged at 75MT; the June USDA number was 77MMT; IKAR consultancy has increased their forecast to 79.5MMT. And SovEcon, who have been above 80MMT for the entire campaign, raised their estimate mid-month to 82.7MMT.

The lack of demand and commercial activity in the export market remains notable with consuming nations waiting on the European and Black Sea harvests to ramp up to full pace, and the weight of new crop supply to pressure prices lower, before extending cover.

However, there already appears to be tightness in Black Sea wheat due to the lack of farmer selling. According to local analysts, this could easily extend well beyond July as Russian farmers are on the cusp of a huge sunflower seed crop, which is worth a lot more than wheat and takes up double the storage capacity.

After getting their butts handed to them last year, there is a decided reluctance on behalf of exporters to go hard at selling new crop ahead of harvest, especially with historically low carry-out stocks. Based on last years’ experience, going short harvest positions in front of the Russian farmer is quite a high risk, low reward strategy.

Except for Australia and Russia, wheat production estimates appear to be on the decline – ironically at the same time as most futures markets are falling to multi-month lows. Moreover, carry-out stocks amongst the major exporters are estimated to hit multi-year lows. Nevertheless, it is the demand side of the equation that continues to cloud the picture.

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

Sea freight rates on the rise…

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Global sea freight rates are on the rise with the Baltic Dry Index (BDI) posting its largest-ever weekly gain, underpinned by a rebound in global commodities trading. The index affords a glimpse into the future by providing a real-time indicator of global demand for commodities and raw materials.

The 35-year old index is issued daily by the London based Baltic Exchange. It is a composite of the time charter averages for capsize, panamax and supramax vessels used to ferry commodities such as coal, iron ore and grains.

It is a measure of the correlation between the supply of large bulk cargo ships and the demand to utilize those ships on twenty of the world’s busiest dry bulk shipping routes. In March 2018 the BDI vessel ratios were reweighted to 40 per cent capsize and 30 per cent for both panamax and supramax. Handysize vessels were excluded.

The index climbed a modest 1.8 per cent, or 28 points, on Friday to cap a record weekly gain of 68.5 per cent and close at a six-month high of 1,555 points (Figure 1). It has soared almost 300 per cent since the low of 393 points set on May 14 in the wake of a halt in global trade due to coronavirus lockdowns.

Figure 1: Baltic Dry Index – 5-year trend                                      Source: Trading Economics

A revival in iron ore demand from Chinese steelmakers, coupled with increased production and exports of iron ore from Brazil, are the key drivers of the recent strength. China’s crude steel output hit a record high in May, and iron ore inventories have dropped steadily in June to under 108 million tonne, their lowest since October 2016.

The length of the rally will most likely depend on how resolutely China replenishes depleted raw material stocks as well as the ongoing COVID-19 recovery and government stimulus activity across the globe. The worst of the impacts on trade appears to have passed, and the gradual reopening of economies will boost the dry bulk market.

The panamax index, which is the vessel size most relevant to the global grains market, rose 61 points on Friday, or 5.5%, to close at 1,178 points. The index surged 38.3% last week, the biggest weekly rise since July 2014. Average daily earnings for panamax vessels, which usually carry cargoes of about 60,000 to 70,000 tonnes, rose US$2,934 across the week to close at US$10,598 on Friday.

And it is not only iron ore on China’s shopping list. China is quietly buying up soybeans in astounding quantities; they have sucked Brazil dry in a little over three months of marketing, and now they have turned to the United States (US). Official export data suggests that Brazil shipped almost 31 million metric tonne (MMT) of soybeans in April & May with 22.2MMT of that going to China, some 66 per cent more than the same period in 2019.

And it appears that this may be more than restocking? There have been persistent market rumours that China wants to double the size of its bean reserve, from an estimated 7MMT in recent years, to 14MMT or even 15MMT. With a weekly crush of more than 2MMT, the current stockpile doesn’t buy them much security were something to interrupt the soybean pipeline.

The trade war has demonstrated that the supply chain can be disrupted, not only by natural causes such as drought and flood but by political issues as well. Add a global pandemic, and China is rightly concerned. It is in the interests of the Middle Kingdom to increase its reserve, and that is precisely what appears to be happening at the moment.

China reportedly pledged to ramp up buying of US agricultural commodities after the Hawaii summit last week between the US Secretary of State and the Chinese Foreign Minister. Rumours suggest that, in addition to soybeans, Beijing will grant quotas for 5MMT of corn and 3MMT of wheat in the near future.

The rise in sea freight rates was evident last week when the result of the latest Egyptian (GASC) wheat tender was announced. On June 10 GASC purchased 120,000 metric tonne of Russian wheat for mid-July delivery with a freight rate of US$10.00. Last week they purchased 240,000 metric tonne for late July/early August delivery, 50 per cent of which was Russian origin, where the average freight rate was almost 20 per cent higher at US11.82.

And that business was put on before last week’s surge in sea freight values. This is certainly the type of market where getting the consumptive business on the books and going short the freight could get very messy.

On the other hand, higher sea freight rates tend to increase the competitiveness of Australian agricultural exports into Asia. The sailing time from key origins, such as the Black Sea region, the United States, Canada and Argentina, are all much more than the sailing time from Australia.

If winter crop production prospects remain buoyant here in Australia and the sea freight rally is sustained, it could provide a welcome boost to the prospects of rebuilding export relationships and supply pathways into critical Asian markets late this year and in the first half of 2021. Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Drought in North Africa increases the region’s reliance on wheat imports…

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Grain production in the North African countries of Morocco, Algeria and Tunisia has been severely impacted by one of the worst droughts in the last four decades, leading to an increase in regional imports to meet domestic demand requirements.

According to the United States Department of Agriculture (USDA), the North African region (which also includes Egypt and Libya) is forecast to overtake the Middle East as the world’s biggest importer of wheat in the 2020/21 marketing year (July to June) due to the decrease in production.

Domestic consumption in the region is expected to remain relatively static at around 47.1 million metric tonne (MMT). However, production is forecast to be around 17.4MMT, down around 6 per cent compared to the previous marketing year and 17 per cent lower than 2018/19.

Consequently, local stocks have been run down over the last twelve months and total wheat imports for the region are now forecast at a record 29.7 million metric tonnes (MMT) in 2020/21. This is an increase of 1.8MMt, or 6.5 per cent compared to the year ending June 30, 2020.

The increase is headlined by Egypt, the world’s biggest importer of wheat, who is predicted to import around 13MMT in 2020/21, compared to 13.3MMt in the current year and 12.3MMT last year.

Wheat production in Egypt has not been affected by the drought afflicting the rest of North Africa, as a much higher proportion of the planted area is under irrigation. Harvest got underway last month, and it is expected to yield around 8.9MMT off 1.39 million hectares, an increase of 1 per cent and 5 per cent compared to the previous two seasons.

The government intends to buy around 3.6MMT of that production for its multi-million dollar food subsidy program. Egyptian farmers don’t like selling all of their crop to the state, preferring to store around half for their own use and selling some in their local souks.

Domestic consumption is pegged at 20.8MMT in 2020/21 with the additional imports going to building up the country’s strategic reserves, a food security measure announced by President Abdel Fattah al-Sisi amid supply concerns due to coronavirus lockdowns.

Morocco is suffering its second successive year of drought, resulting in a sharp decrease in the area planted to cereals. The total harvested area is estimated at 3.8 million hectares, around 20 per cent below the five-year average. Wheat makes up almost three-quarters of the area at 2.7 million hectares.

Harvest started in May and yields are well below the long term average. The wheat production is expected to fall to 3.0MMT, down almost 27 per cent compared to last season and 49 per cent lower than the long term average.

Moroccan wheat imports are set to hit a record 5.8MMT in 2020/21 as a result of the lower production, and the government has already taken the unusual step of exempting import taxes through the end of 2020. This is on the back of a sharp increase in 2019/20 imports to 5.1MMT compared to 3.7MMT in 2018/19.

Private importers in Morocco have led a push to double wheat inventories to six months of milling requirements by the end of October. According to the agriculture ministry, five months’ worth of soft wheat and four months’ worth of durum wheat had already been stockpiled by the end of last month.

The regional drought has not affected grain production in Algeria as much as Morocco to the west and Tunisia to the east. Wheat production is forecast at 3.8MMT, down 5 per cent on last season, but 23 per cent higher than the five-year average.

Despite the relatively good season, Algerian wheat imports are forecast to increase by 1MMT to 7.5MMT, around 4 per cent lower than the five-year average of 7.8MMT.

While wheat production of 1MMT in Tunisia is relatively close to the five-year average, it is down more than 31 per cent on last season’s bumper harvest. The country relies heavily on imports and is forecast to purchase around 1.9MMT of foreign wheat in the next twelve months. This is approximately 20 per cent higher than the current season imports but only 5 per cent above the five-year average.

Environmental constraints limit the development of agriculture in Libya. Cereals are cultivated in the coastal regions where supplementary irrigation is possible. That said, wheat production is minimal, and the country is almost totally dependent on imports which are likely to total around 1.5MMT in the twelve months to the end of June 2021.

Grain tenders from the region have been slow in recent months but purchases usually pick up after local harvests have been completed and new crop export supplies come online across Europe and the Black Sea.

Egypt has issued two tenders for delivery in the 2020/21 marketing year, buying 120,000 metric tonne of Ukrainian wheat on June 2 at an average price of US$220.65 cost and freight (C&F) and 120,000 metric tonne of Russian wheat on June 10 at an average price of US$227.25 C&F (on 180-day deferred payment terms).

Tunisia bought 25,000 metric tonne of soft wheat last week after tendering for as much as 134,000 metric tonne. The wheat was purchased at $215.90 C&F, US$7 higher than their April tender and will most likely come from France.

Last week’s USDA report was bearish for wheat with increased global production (Russian crop unchanged), slightly lower consumption and record ending stocks. Any increase in demand in the Mediterranean Sea region can only be good for Australian growers. This potentially means less wheat will be available to ship out of the Black Sea region into Australia’s traditional Southeast Asian markets late in 2020 and in the first half of next year. Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Aussie dollar strength a headache for domestic grain exporters…

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The biggest mover in domestic grain markets last week was the local currency, briefly trading above the US$0.70 barrier on Friday. The Australian dollar added more than US$0.03 over the week to close at US$0.6968, the highest since the first working day of 2020. This continues a sustained rally after hitting an intraday low of US$0.5509 on March 19.

The fall to that level was even more spectacular, plunging more than US$0.10 in the space of ten days as the COVID-19 pandemic sent shivers through global markets. Fears of a recession in Australia driven by decreased consumption, increased unemployment, and a significant and prolonged downturn in demand for Australian commodities saw traders scramble to ditch the Aussie in favour of the greenback.

The US dollar jumped in March, as fears over the viral pandemic reached their peak. Investors stockpiled the greenback in a rush to pay debts and pursue the safety of the world’s reserve currency. As the global economy slowed to a crawl, the dollar surged to record highs against currencies such as the Brazilian real and sterling.

The recent strength in the Australian dollar means it has rallied by more than 26 per cent against the US dollar in eleven weeks, despite the sharpest downturn in the domestic and global economy since the Great Depression, more than ninety years ago.

A key reason for last week’s sharp move was selling pressure on the US dollar, mirroring a broader rebound in key global currencies, commodity prices and equity markets across the world. It appears to be driven by increased optimism over the recovery from coronavirus as lockdowns across the globe are eased.

The greenback is seen as a barometer for the progress and resilience of that optimism, despite the grim political and economic situation in the United States at the moment.

Perhaps there is a more significant influence at play here. China’s economy is recovering from its COVID-19 stupor and with that comes an increased demand for Australian commodities, in particular iron ore. Iron ore prices closed above US$100 per metric tonne (/mt) last week, the first time in almost a year.

The price has rallied almost 22 per cent in the last six weeks as a result of increased demand from China and severe supply disruptions in Brazil, Australia’s biggest competitor. Even with the strength in the Australian dollar, iron ore prices in local currency terms are not far off their all-time highs.

China has opened its state-owned factories as quickly as possible in a bid to improve industrial output and get the economy back on track. And it appears to be working with industrial production in April up 3.9 per cent compared to the same month last year.

The surge in the price of iron ore and other essential export commodities has seen Australia post a current account surplus for twelve consecutive months. In other words, income from Australian exports and foreign investments has exceeded outgoings on imports and payment to overseas investors every month for the year to April 30.

Australia’s enviable trade position, its overwhelming success in the containment of coronavirus and the Reserve bank’s ‘hold’ stance on interest rates makes the ‘dollarydoo” a favoured asset amongst investors at the moment. Notwithstanding the imminent end to the country’s near 29-year recession-free run.

And many currency pundits are forecasting an Aussie dollar in the seventies for the balance of 2020, and into next year, assuming US-China trade tensions don’t escalate, and commodity prices remain supported. The bearish sentiment from US banks on the value of the greenback also endorses that outlook.

So, what does all this mean for grain prices? In the US, the weaker dollar pushed corn and soybeans futures markets higher, with the nearby contract closing the week 1.7 per cent and 3.2 per cent stronger respectively. Chicago wheat closed in negative territory, with the July contract losing 1.1 per cent for the week. The market fell sharply on Friday, erasing the gains made in the previous two trading sessions.

Black Sea wheat reportedly traded at US$205/mt free on board (FOB) for July shipment and US$206/mt FOB for an August loader, a week-on-week increase of US$4/mt and US$6/mt respectively. The big surprise was August trading at a premium to July, which until last week had been spruiked at a slight discount.

Here in Australia, the surging Australian dollar, combined with growing confidence in new crop production, pushed grain prices sharply lower. Old crop values saw the most significant drop with smaller declines in new crop bids.

The export zones were the hardest hit with old crop wheat values in Western Australia falling around AU$25/mt, or 6 per cent, across the week. The falls in South Australia and Victoria were not as dramatic, but they were still down AU$12/mt and AU$18/mt, or 3 per cent and 5 per cent respectively.

In comparison, new crop wheat values in Western Australia fell by a modest AU$4/mt week-on-week, far less than the full impact of the currency movement, thereby pushing export values higher in US dollar terms. In South Australia and Victoria, the fall was higher at AU$6/mt, but again the trade has absorbed some of the currency influence. New crop wheat prices in northern New South Wales and onto the Darling Downs fell by around AU$10/mt.

Domestic barley prices, already butchered by the burden of Chinese import tariffs, were less affected, falling between AU$2/mt and AU$6/mt depending on the port zone. In the new crop slot, barley bids were weaker across the board, but export values were steady in South Australia, around US$3/mt higher in Western Australia and close to US$5/mt higher in Victoria.

With almost all of the Australian winter crop in the ground bar Queensland, a high degree of production certitude has returned to the Australian agricultural landscape. With that comes an increased exportable surplus of cereals, canola and pulses across a majority of the country’s port zones. Australia will need to be internationally competitive.

If the strength in the Australian dollar persists, it will most likely mean further weakness in domestic grain bids unless there are significant downgrades to the European, Black Sea or North American winter and spring crop harvests. Call your local Grain Brokers Australia representative on 1300 946 544 to discuss your grain marketing needs.

Drought in Thailand is good news for Australian barley growers

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Severe drought in Thailand in the first five months of 2020 has adversely affected the production of off-season (dry-season) rice and corn, primarily due to a lack of irrigation water as reservoirs are critically low. This will decrease the country’s exportable surplus of rice and potentially increase demand for imported wheat and barley in the 2020/21 marketing year.

The majority of Thailand’s rice and corn production occurs during their wet-season with planting commencing in May and running through to the end of June for rice and the end of August for corn. The corn harvest commences in September and runs to the end of the year while the rice harvest is concentrated into the last two months of the year.

The dry-season production cycle is heavily reliant on the availability of irrigation water. Most of the planting occurs in November and December, and harvest is generally completed by the end of April.

The area planted to dry-season crops fell 36 per cent to 1.4 million hectares relative to the 2018/19 crop year, after historically low precipitation during the 2019 monsoon led to record low water storage inflows late last year. Consequently, production of off-season rice and corn are forecast to decline by 41 per cent and 25 per cent respectively compared to the previous season.

Total 2019/20 rice production is forecast at 18 million metric tonne (MMT), 14.8MMT in the wet-season production cycle and 3.2MMT in the dry-season window. This is the second-lowest level of production in the last ten years after a severe drought in the 2015/16 season slashed output to 15.8MMT.

Thailand’s corn production in the current marketing year is expected be around 4.5MMT, a fall of 20 per cent on 2018/19 levels. This was mainly due to an infestation of fall armyworm in the wet-season crop and a dry spell in June and July last year, seriously slowing early crop development.

Demand for feed grain in Thailand in 2020/21 is forecast to remain relatively static at around 20.3 MMT as shrinking swine production (a result of African swine fever) is offset by growing production in the poultry, dairy cattle, and fishery sectors. Nevertheless, this is contingent upon a recovery in animal protein consumption to pre-COVID-19 levels by early 2021 at the latest.

Of the total feed demand, the derived demand for corn is estimated at around 8.5 million metric tons. But even with an expected rebound in domestic corn production in 2020/21, local corn producers will still only be able to supply around 6MMT.

It is this gap, between domestic animal feed requirements and corn production, that will drive import demand for corn – particularly from neighbouring countries like Myanmar – and other livestock feeds such as feed wheat, barley and dried distillers grain.

Thai wheat imports are forecast to decrease by 2 per cent in 2020/21, to 3.2MMT. Milling wheat is expected to make up just over one-third of these imports at 1.1MMT, down from 1.4MMT in 2019/20. The current season imports were higher than normal after flour millers built stocks when the government announced plans to ban the agricultural pesticides glyphosate, paraquat, and chlorpyrifos.

The 2020/21 milling wheat demand could fall even further if the tourism sector doesn’t recover quickly from the effects of COVID-19. Tourist arrivals in March fell by more than 76 per cent compared to a year earlier, having a devastating impact on street vendors and noodle stalls.

Feed wheat for the intensive livestock production sector makes up the 2.1MMT import balance.  The government retains import limits on feed wheat that have been in place since January 2017 to protect domestic corn farmers from cheaper feed wheat imports.

Under these restrictions, importers are required to purchase domestic corn before being permitted to import feed wheat at a 3 to 1 absorption ratio. In other words, to import a tonne of feed wheat, a mill must use three tonne of domestic corn. The government also set the minimum purchase price for 2019/20 season domestic corn at 8 baht per kilogram, or approximately US$252 per metric tonne (/MT), for feed mills.

With lower domestic corn production, these constraints seriously hamper the ability of stockfeed merchants to fill the demand void with imported wheat. This is where imported feed barley comes into the equation.

Interestingly, the Thai Feed Millers Association (TFMA) passed on last week’s tender for as much as 227,500 metric tonne of feed wheat for August to October delivery. Apparently, the offers were considered to be too high with lowest at around US$215 cost & freight (C&F), US$10/MT higher than expectations.

Maybe this opens the door for more purchases of Australian feed barley. Although Australian barley prices have recovered somewhat from the sharp drop after the draconian Chinese tariffs were imposed, at around US$195/MT C&F Thailand, it is significantly cheaper than the latest feed wheat tender prices.

While not in the same league as China, Thailand has been an increasingly active buyer of Australian barley in recent years. Purchases of 250,000MT in the 2017/18 Australian crop season (October to September) increased to almost 400,000MT in 2018/19, making them Australia’s third-largest barley customer. At more than 430,000MT, purchases in the first six months of this season have already exceeded last year’s total, with almost all of it being feed barley.

South-East Asian countries such as Thailand will not individually replace China as a destination for Australian barley. However, with a significant freight advantage over the Black Sea, the region as a whole can play a critical role in shifting the focus away from China and avoid competing head to head with Black Sea exporters into Saudi Arabia.

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

Wheat production concerns in Europe spook the market…

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The world wheat market is certainly at the whim of the weather right now with futures markets bouncing sharply off an eight-month low set early last week as concerns for the state European Union (EU) winter crop start to outweigh those of the Russian crop.

As the world emerges from the global coronavirus shutdown, northern hemisphere weather, especially in the EU, Russia and Ukraine, will most likely be the key wheat market drivers over the next six weeks.

The buyers supposedly came back into the market on talks of decreased production in Russia, but most analysts appear to be holding their estimates firm in the 75-77 million metric tonne range, well up on last year. The winter wheat areas have received some rainfall in recent weeks and are holding production but the spring wheat areas, particularly Siberia, do appear to be suffering from lack of moisture and the 14-day forecast is not favourable.

There has been very little chatter about the growing production concerns across many parts of the EU. The newswires tend to focus far too intently on Russian crop prospects these days, as they are the world’s biggest exporter of wheat, and tend to set global export values.

Interestingly, with restrictions on Russian wheat exports for the last two months of the current marketing year, the EU has usurped their crown for the 2019/20 season, as their exports pass the 35 million metric tonne mark, with six weeks of the old crop year remaining.

Large swathes of western and central Europe have received insufficient spring precipitation to replenish soil moisture levels as the crop moves into its reproductive phase, the peak water use growth stage. Daytime temperatures have also been above average and radiation levels have been extremely high.

Consequently, crop biomass accumulation has slowed considerably with actual crop conditions generally worse than in 2019. Additionally, many spring crops were sown into inadequate moisture and germination has been poor.

The forecast for dryer than average conditions for many parts of France, Germany and Poland for the next couple of weeks will undoubtedly stress the crop in some regions. There is some rain in the forecast, but it is much less than what is being lost to evapotranspiration. Much more is needed in the next few weeks to maintain yield potential.

Romania and Bulgaria would appear to have serious production losses in the offing as drought conditions persist. Soil moisture is so poor in some areas that crops are reported to be stunted and showing signs of wilting and early leaf senescence. No amount of rain will prevent severe production losses in the affected plants.

While not as acute, there are production issues in Austria, Slovakia and the Czech Republic, namely, soil moisture deficits and daytime temperatures up to 2°C above the long term mean. This is hampering winter crop development, bringing their yield outlook below the five-year average.

European crop monitor, MARS, called the new crop milling wheat yield 5.72 metric tonne per hectare (MT/ha) compared to the 2019 yield of 6.00MT/ha. This down from April’s forecast of 5.87MT/ha and is almost 1 per cent below the five-year average of 5.77MT/ha. Durum wheat yields were also lower at 3.38MT/ha compared to 3.47MT/ha last year, 3.43MT/ha last month and a five-year average of 3.49MT/ha.

These yields put the total EU wheat crop at around 139 million metric tonne. This is 4 million metric tonne lower than last week’s forecast from the United States Department of Agriculture (USDA) of 143 million metric tonne and is 16 million metric tonne lower than the 155 million metric tonne produced in 2019/20.

Contrary to some news reports last week, the window for serious damage to the northern hemisphere crop is still wide open. All the major crop failures in Russia of recent times have been a result of the weather problems in June, July and August, so there is still oodles of time for production prospects to worsen; or improve.

In last week’s global supply and demand update for the USDA, total 2020/21 wheat production in the seven major exporters was 1 million metric tonne higher than last year at 378 million metric tonne. However, a production decrease amongst the northern hemisphere exporters of 10 million metric tonne was more than offset by a 12 million metric tonne production increase by the southern hemisphere exporters: namely Australia and Argentina.

In other words, the global wheat balance sheet is relying heavily on the increase in southern hemisphere production. The challenge is the Australian and Argentinian winter crops are still being sown. They have the entire production cycle ahead of them, and the resultant output won’t hit the export market for another six months.

And that is using an EU wheat crop estimate that is much bigger than most of the European trade is forecasting. Additionally, the USDA report had the combined Russian and Ukraine wheat production at 105 million metric tonne, which also appears to be on the optimistic side compared to estimates from several industry pundits.

The washup here is the EU, Russian and Ukraine winter crops need rain, and they need it quickly. And well above average precipitation, coupled with favourable crop conditions, are required through to harvest for current yield estimates to be maintained.

The big unknown in the whole equation is what impact has the coronavirus had on global wheat demand? If demand recovers quite quickly, then further supply issues will be bullish for new crop values. If there has been some severe erosion of global wheat demand in the 2020/21 marketing year – which is the most likely scenario – then the market can absorb further northern hemisphere production issues with minimal upward pressure on price.

Of course, if the EU and/or Russian 2020/21 winter crop production stabilises, or surprises to the upside, then last week’s futures low will likely be tested as the new crop harvest approaches.

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

India’s record wheat harvest winds down amid market turmoil…

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This season’s Indian wheat harvest has been severely interrupted by the national COVID-19 lockdown. But as it winds down across most states, the Ministry of Agriculture and Farmers’ Welfare (MoAFW) has increased its production forecast by almost 1.0 million metric tonne, to a record 107.2 million metric tonne for the 2019/20 marketing year.

India is the world’s second-biggest producer, and consumer, of wheat behind China. This is the first season where production of the country’s major rabi crop has topped the 100 million metric tonne mark, but the fourth consecutive record crop after poor harvests in 2015 and 2016.

Excellent late monsoon rains in September last year, and an increase in the availability of irrigation water, provided ideal seeding conditions in October and November, encouraging farmers to increase the area planted to wheat. The MoAFW estimates that the final area increased by almost 6 per cent year-on-year, to 31.1 million hectares, implying an average yield of 3.45 metric tonne per hectare.

A steady increase in the government’s minimum support price (MSP) for wheat, in conjunction with an expansion of the MSP procurement operations across most states, has also encouraged Indian farmers to maximise the land allocated to wheat in recent seasons.

That said, the area has been relatively steady over the last twenty years (Figure 1). Still, average production off that land has been increasing steadily due to improved varieties, higher inputs, improved agronomic practices and better disease and pest control.

The excellent soil moisture profile at planting followed by consistent, widespread rain throughout the entire growing season, and relatively little incidence of pests, disease or hail have been conducive to record production this year.

However, the country-wide lockdown, announced in late March to stem the spread of the coronavirus outbreak, led to a severe labour shortage across rural India, crippling harvest activities lo9and hindering the bagging and movement of the grain to market.

Although farming has been declared an essential service and agriculture markets are exempted from the lockdown, a shuttered economy left farmers facing enormous challenges. The supply chain has been hit badly – train and bus services have been suspended, and trucks face major hurdles in transiting state borders due to strict checks.

As the record harvest draws to an end, the farmer focus now turns to marketing their grain before it is spoilt. The humid conditions make it extremely difficult for producers to keep the moisture content below 14 per cent. Any rain only compounds the problem as very few farmers have undercover storage facilities.

India’s 7,000 wholesale food markets are the only avenue for getting these critical food supplies to the country’s 1.3 billion residents, and the nationwide restrictions have severely hit their operation.

Under Indian law, wheat farmers are compelled to sell their grain exclusively at these wholesale mandis to commission agents, who on-sell it to private traders and state buyers. These commission agents typically hire teams of labourers from across the country to unload, clean, weigh, repack and re-load millions of bags of wheat onto trucks and trailers which then transport it to private and government warehouses.

The absence of private traders from the market will put the onus on the Food Corporation of India (FCI) – India’s state grain buyer and warehouser – to purchase a higher proportion of this season’s crop. This will only add to the enormous wheat stockpile already sitting in FCI warehouses.

According to government reports, this totalled 24.7 million metric tonnes as of April 1, around 26 per cent of annual domestic demand and more than three times the government endorsed goal.

According to the United States Department of Agriculture, wheat consumption in India is forecast to increase to around 96 million metric tonne in the marketing year ending June 30. However, despite surplus domestic supplies and an increasing population, domestic consumption has stagnated since a sharp increase in 2016/17.

With government storages expected to be overflowing in June, the Indian government needs to find a home for the surplus. The high MSP-driven purchasing program has pushed domestic prices to around US$35 over export parity. However, if prices ease as a result of the record crop and the breakdown in traditional market flows, exports to neighbouring countries such as Nepal, Afghanistan, Bangladesh and Sri Lanka are possible.

Historically, India has been a significant exporter when supply exceeded demand. In both the 2011/12 and 2012/13 seasons, the country exported more than 6 million metric tonne. The USDA has India pencilled in for 1.0 million metric tonne of wheat exports in the 2020/21 marketing year, but this is not nearly enough to solve the cornucopia.

Unfortunately, it seems that a substantial quantity will be lost to spoilage as growers battle to bring their produce to market, private traders are absent due to the coronavirus restrictions, and record carry-in stocks means the government is struggling to find storage space for their higher than expected new crop purchases.

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

China set to impose exorbitant tariffs on Australian barley imports.

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It appears that eighteen months of uncertainty for Australian barley growers regarding the outcome of China’s anti-dumping and countervailing duties investigations may be about to end in tears. China’s Ministry of Commerce (MOFCOM) is reported to be close to announcing exorbitant tariffs on all barley imports from Australia as a result of their prolonged inquiry.

The news comes as farmers across the country are busy planting this season’s winter crop and arrives too late for any material change in planting intentions. Barley is traditionally Australia’s second-biggest winter cereal, by area and volume, after wheat, and a large proportion of this season’s 4.5 million hectare crop has already been planted.

Beijing announced the probe on November 19, 2018, after the China International Chamber of Commerce complained that Australian barley was being subsidised by the government, allowing it to enter the Chinese market in large volumes and at discounted prices, hurting domestic producers.

According to a joint press release from Australian agricultural industry groups, Beijing is proposing two, supposedly yet to be finalised, tariffs. An anti-dumping margin of 73.6 per cent and a subsidy margin of 6.9 per cent. That is a total of 80.5 per cent and would make it almost impossible for Australia to compete with alternate barley origins into the valuable Chinese market.

The information released by MOFCOM over the weekend raises a whole myriad of questions, the answers to which the Australian barley industry can only guess. When will the tariffs be imposed? Will they be immediate or commence at some future date? Will cargoes currently on the water be exempt?

And probably the most burning question. Will it cover both malting and feed barley? Will the Chinese government find a way to impose the tariffs but continue to buy Australian malting barley? Chinese brewers and maltsters, many of which are semi-government operations, rely on Australian malting barley as the quality of domestic production is not suitable, and freight from alternative origins such as France is much higher.

The domestic grains industry, in conjunction with the Australian government, have been given ten days to respond, with MOFCOM expected to release their final determination on May 19, 2020. This will be exactly eighteen months after the commencement of the investigation, the maximum allowable period under World Trade Organisation rules.

The threat of sanctions by MOFCOM come at a time when relations have frayed between Canberra and Beijing, aggravated by the Australian government push for an investigation into the origins of the coronavirus outbreak.

If China follows through with the imposition of the proposed tariffs, then it places a huge question mark over Australia’s barley exports for the balance of this season and the current forecasts for exports to China in 2020/21.

In recent years, Australia has been China’s largest supplier of barley with the grain going into both the brewing and stockfeed markets. In the 2017/18 Australian marketing year (October 2017 to September 2018) China imported almost 6.5 million metric tonnes (MMT) of Australian barley.

This was valued at more than AU$2.2 billion and accounted for around 75 per cent of China’s barley imports in that period. Though still significant, the volume dropped substantially in the 2018/19 season, to a tad over 2.0MMT, or around AU$700 million, as the anti-dumping investigation made it difficult for consumers to acquire import permits.

China is still Australia’s biggest export barley customer this season with around 1.0MMT shipped to the end of April. Second on the list of destinations by volume is the Queensland domestic market, with transhipments, predominantly from South Australia and Western Australia, into the port of Brisbane totalling more than 0.9MMT. Next is Thailand at just over 0.4MMT and then Japan at 0.2MMT.

With an excellent soil moisture profile throughout News South Wales, Victoria and South Australia and promising rainfall across many parts of Western Australia last week, most of the Australian barley crop is being planted on time and into favourable soil conditions.

That means Australia is looking at a barley crop of at least 10MMT. If farmers manage to plant all of their intended area in those states and we get an above-average winter and spring, then production of 12MMT is quite achievable. This would give Australia an exportable surplus in the 6-8MT range, well up on this season’s number.

In the absence of China, one of the first destinations domestic exporters will look to is Saudi Arabia. In particular, the Arabian Gulf, where Australia has a freight advantage compared to Black Sea exporters. The latest tender price into Dammam was US$207 cost & freight (C&F). With freight of US$19 out of Western Australian ports and the Aussie dollar at US$0.65, that equates to AU$289 free on board (FOB) or around AU$262 free-in-store (FIS).

New crop Black Sea barley was reportedly bid US$170 last week. With shipping to the Arabian Gulf around US$29, that equates to a delivered price of US$199 C&F. Using the freight and currency numbers above, that works back to AU$277 FOB or AU$250 FIS Western Australia. Ex South Australia that would be a grower bid of about AU$230.

The other alternative for volume barley exports will be to displace corn into feed rations throughout Asia. While that is possible at current prices, there is a huge corn harvest coming off in South America at the moment, the northern hemisphere corn crop will be big if all goes well and COVID-19 has decimated global demand. On that basis, it is unlikely global corn values will hold current levels as we move closer to the Australian harvest.

It is hard to understand what has driven the Chinese decision, and we will have to wait until May 19 to find out the full details. However, with the potential for a substantial Australian barley crop this season, any erosion of demand or closure of traditional markets will be detrimental for grower bids unless the Aussie dollar comes to the rescue.

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

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