Weekly Commentary Archives | Grain Brokers Australia

EU production rebounds, with France leading the way…

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Large swathes of Europe have been denied a traditional spring after enduring one of the coldest Aprils in many decades. This hindered the growth and development of winter crops and delayed the planting and emergence of spring and summer crops across much of the continent.

These conditions were in stark contrast to warmer than average temperatures that dominated late March weather in many countries. On the coldest April days, minimum temperatures were among the lowest on record, with severe frosts battering crops in a belt that extended from Scotland in the north to Italy and Greece in the south.

Fortunately, it is still early in the season, and the negative impacts on winter and spring crop production are expected to be minimal at this stage. However, several instances have led to a downward revision of yield forecasts for canola and durum wheat in parts of France and Italy.

Total wheat production for the 27 member states of the European Union is expected to increase 7.79 million metric tonne (MMT), or 6.2 per cent, to 292.65MMT on the back of more favourable seeding and growing conditions, especially in France. An increase of 3.5 per cent in the seeded area was the primary contributing factor, with the average yield up just 2.6 per cent.

Barley production is also expected to experience a modest rebound in output with the improved seasonal conditions. Total EU production is forecast to increase by just 1.28MMT, or 2.3 per cent, to 56.50MMT, emphasising how well the crop performed last year compared to wheat across most of the EU, France being the exception.

Canola is the other big-ticket winter crop commodity in the EU, but production is now forecast to be quite similar to last season, with the cold start to the spring taking its toll. Farmers are forecast to harvest 16.46MMT in 2021 compared to 16.34MMt last year. The total planted area will be down slightly, with a higher average yield expected to compensate for that loss.

FranceAgriMer released its latest crop report for the EU’s biggest grain producer last Friday. French crop conditions remain well above the same time in 2020, but the data did reveal the French soft wheat crop had deteriorated for the fourth successive week. In the week to May 3, the government farm agency estimated 79 per cent of the soft wheat crop was in good or excellent condition, down from 81 per cent a week earlier.

Rains returned to much of France over the last couple of weeks, and there is more on the forecast, easing production concerns after the dry start to spring. The benefit of this soil moisture boost was reflected in last week’s two percentage point decline in soft wheat conditions compared to a four-percentage point decline in the seven days to April 26.

The proportion of the durum wheat area in the good-to-excellent rating category was unchanged week-on-week at 69 per cent, after tumbling from 77 per cent in the previous seven-day reporting period.

The winter barley crop was rated 76 per cent good-to-excellent, down from 77 per cent the previous week and 81 per cent two weeks ago. On the other hand, the spring barley crop was unchanged in last week’s report at 82 per cent after falling five points a week earlier.

Despite the downward trend, French crop ratings remain higher than at the same time in 2020 when developing crops were battered by torrential rain. This time last year, the good-to-excellent score for the French soft wheat crop was just 57 per cent. The barley rating was slightly higher at 59 per cent.

This season’s superior crop conditions are reflected in a rebound in French production estimates for the upcoming harvest. The total wheat crop is forecast at 36.19MMT, up 19.2 per cent, or 5.83MMT compared to last year. The improved production forecast results from a 14.4 per cent increase in the area planted to soft wheat and a slight increase in the average yield from 6.82 metric tonne per hectare (MT/ha) to 7.15MT/ha.

The year-on-year barley production recovery is very similar, up 20.5 per cent, or 2.15MMT, to 12.63MMT. However, this is primarily a yield story, with the planted area only up 1.2 per cent. The average yield is forecast to jump by 19 per cent, or more than 1MMT/ha to 6.33MT/ha.

The French canola crop has perhaps been the worst affected by the string of severe frosts in April, striking as the early winter varieties were in a sensitive flowering stage. This followed reports back in early March that canola crops in several regions had been hit so hard by early-season cold snaps and pest invasions that fields were sprayed out and resown to spring barley.

The French farm ministry estimates the canola area at 0.99 million hectares, down from 1.13 million hectares in their December update and 11 per cent lower than last year’s planted area. Production is now forecast to be 314MMT, down for the fourth consecutive season. This is 29 per cent lower than the five-year average and 44 per cent lower than the record crop of 5.59MMT set in the 2008/09 season.

Global balance sheets are tightening across the board and the world can ill afford production hiccups in Europe this year. The hole in world corn supply is growing with the ongoing dryness in Brazil and an open cheque book in China. As prices rapidly escalate rationing has begun in earnest. Wheat, and to a lesser degree barley, will be called on to partly fill the emerging chasm. The oilseed story is no different, with supplies at record lows in many jurisdictions, including major European producers, and question marks hanging over northern hemisphere production estimates.

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

Canadian farmers react to market signals…

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Canadian farmers are swinging to canola and barley at the expense of wheat, oats and pulses in the current winter/spring cropping cycle. That was the washup of the latest Statistics Canada principal field crop report, which was released early last week.

Statistics Canada said the total area seeded to field crops this year is projected to increase by 1.8 per cent to 26.893 million hectares based on favourable market conditions and historical trends. However, total production is forecast to decrease slightly, on the assumption of a return to trend yields from the record production of 2020-21.

This year’s four week survey period concluded on March 29, with Statistics Canada tabulating responses from more than 11,500 farmers regarding their planting intentions for the 2021/22 production year. Winter wheat has been in the ground for many months now and is emerging from its winter dormancy. However, the spring planting program is about to move into top gear amid dry soil moisture conditions in many areas and grain prices on fire.

It has been widely reported over the last few months that the area planted to wheat was expected to be lower in the coming season than in the 2020/21 marketing year. And so it came to pass when the numbers were revealed, with the total wheat area forecast to fall by 6.9 per cent or 697,000 hectares, to 9.41 million hectares (Mha). This is the lowest wheat area in the last four seasons and comes in 3.7 per cent below the five-year average.

Spring wheat was the big mover, with the estimated area down by 8.8 per cent, or 642,000 hectares, to 6.61Mha. This is the smallest area planted to spring wheat in the last four years and is 4.7 per cent below the four-year average. The winter wheat area was down 11.2 per cent, but since it only makes up 5.2 per cent of total wheat plantings, it was an insignificant component of the decrease. The area planted to durum wheat was up slightly.

The results of the grower survey suggest everybody wants to grow barley. The area is projected to jump by 13.9 per cent, or 426,000 hectares, to 3.49 million hectares. This is the fourth consecutive annual increase, is 27 per cent above the five-year average and is the largest area seeded to barley since the 2009/2010 season.

Tight stocks have pushed domestic prices higher, making potential returns quite appealing for growers relative to spring planted alternatives. Strong demand from China has boosted export demand, and that is expected to continue throughout the 2021/22 marketing year after China nominated increased barley usage as a means of reducing the nation’s reliance on corn. The Chinese tariff on Australian barley imports has also pushed demand to Canada.

Barley exports in the 2020/21 marketing year are expected to total 3.75 million metric tonne (MMT), and China dominates. According to the Canadian Grain Commission, 94.6 per cent of Canada’s licensed barley exports in the August 2020 through March 2021 period were destined for China. The current forecast would be the highest executed barley exports since 3.9MMT was shipped in 2007/08 and 4.0MMT shipped in 1996/97.

The record low carry-in forecast of just 500,000 metric tonne nationally also reflects buoyant domestic stockfeed demand. Crop progress will be keenly scrutinised as the season progresses with a yield of 3.5 metric tonne per hectare (MT/has) required before stocks start to build, assuming 91.8 per cent of the planted area is harvested, and there is no change to domestic demand or exports in 2021/22. The long-term average barley yield is 3.73MT/ha.

According to the Statistics Canada survey, canola planting intentions for the world’s biggest canola producing nation came in at 8.71Mha. This is an increase of 3.6 per cent, or 300,000 hectares, over the area planted in 2020 and reverses a four year downward trend. However, it is still 0.9 per cent below the five-year average.

And there is now an added incentive for the Canadian farmer to maximise their canola area, with prices soaring to their highest level in more than a decade in the five weeks since the planting survey concluded. This is a function of dwindling old crop stockpiles as crushers and exporters fight to secure old crop stocks. The carry out is forecast to drop to 1.2MMT by the end of the 2020/21 crop year on July 31, the lowest end of season number since 2013.

Around 90 per cent of Canada’s annual production is exported to global customers. Foremost among these importers is China who has accelerated imports of the Canadian produced oilseed despite blocking shipments from two of the country’s major exporters since 2019. Government export data reveals around 1.58MMT of canola was exported to China from licenced facilities in the first seven months of the 2020/21 marketing year, 22.5 per cent of total exports for the period.

According to survey responses, the area planted to oats is expected to fall by 6 per cent year-on-year to 1.46Mha, still 7.8 per cent higher than the five-year average. The Lentil area is forecast to be 0.3 per cent lower than 2020 at 1.83Mha, around 3.1 per cent below the five-year average. The big mover on the pulse front was dry peas, with plantings anticipated to decrease by 9.8 per cent to 1.54Mha compared to a year earlier, the smallest area in three years and 6.7 per cent below the five-year average.

Significant precipitation is needed in south-eastern and south-central Saskatchewan, Northern Alberta, and Manitoba. Planting for most principal spring crops typically begins around mid-May. Still, many farmers in southern Alberta started in early April this year due to a lack of snow cover and above-average temperatures.

The dry conditions could prompt growers to make last-minute changes to their seeding plans, resulting in a reduction in plantings of small-seeded crops such as canola, with barley the potential beneficiary. The weather conditions over the next few months and the elevated price regime will no doubt influence the final seeded area.

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

Nowhere to run to, baby, nowhere to hide…

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Grain futures and cash prices across the globe copped a speeding ticket last week as bullish news flooded international markets, sending the bears back into hibernation. Arguably, the headline ticket right now is the plight of the Brazilian corn crop and the looming supply void, into which wheat will likely need to dive headfirst.

Global corn importers rely heavily on the Brazilian safrinha corn crop, and it is in serious trouble. Also know as the second corn crop, it is sown immediately after the soybean crop has been harvested. But the planting program was late after excessive rainfall delayed the soybean harvest. The soil moisture profile was excellent when seeding finally commenced, but it has been much drier than usual in many key growing regions ever since.

In the central-southern state of Mato Grosso do Sul, which accounts for 13 per cent of national safrinha corn production, the ideal planting window generally closes at the end of February. This year, safrinha planting commenced on January 29, but it didn’t conclude until April 16, around six weeks after the ideal planting window had closed. Approximately 44 per cent of the states safrinha area was seeded in March and early April.

Parana is south-east of Mato Grosso do Sul and produces around 16 per cent of the national safrinha output. By the end of February, only 38 per cent of the safrinha corn crop had been planted. A year earlier, that number was 61 per cent. This season, 58 per cent was sown during the second half of March, but the ideal planting window for safrinha corn in Parana usually closes by February 20.

The late planting was always problematic as the monsoon generally ends in mid to late April with the onset of the annual dry season. And the most recent meteorological evidence suggests that the rainy season is already winding down. With subsoil moisture and crop development well below average going into May, especially in the central and southern states, there is likely to be significant deterioration in crop conditions in the coming weeks.

That is already the case in Parana. Last week’s crop rating plummeted to 62 per cent in good condition, down from 76 per cent just a week earlier and 92 per cent the week before that. There are reports that the moisture stress is pushing the crop into early pollination. The states vegetative index is one of the worst in recent years, and the soil moisture profile is the lowest in 30 years.

Corn crops in Mato Grosso and parts of Mato Grosso do Sul received enough rainfall over the past week to maintain plant conditions but not build soil moisture. Rain was quite scattered across the other Safrinha corn regions, and soil moisture deficits are increasing. The states of Parana, Sao Paulo, Minas Gerais, and Goias will either see minimal rainfall or nothing at all over the next two weeks. Forecasts beyond that point are also unflattering.

The poor crop conditions and dry forecast has local analysts clambering over each other to lower their production forecasts. Agricultural consultancy AgRural called the total Brazilian crop 103.4 million metric tonne (MMT). Rabobank pegged total output at 105MMT, versus their previous estimate of 107MMT. IHS Market (formerly Informa) reduced their estimate by 4.6MMt to 104MMt, with their safrinha crop number reduced from 85MMT to 79.5MMT.

Respected consultant Dr Michael Cordonnier reduced his total Brazilian corn crop projection by 2MMT to 103MMT, with a lower forward bias based on the crop lateness, poor soil moisture profile and dry forecast. He believes that the safrinha corn crop could be cut by 10MMT or more. The last time Brazil had similar crop conditions and weather patterns at this point in the season was in the 2016/17, and total corn production fell by 17MMT year-on-year.

Cordonnier also noted that farmers in Brazil are becoming increasingly anxious about an aggressive new corn pest: corn leafhoppers. Climatic conditions and seasonal history leading into 2021 had agronomists predicting the second corn crop would be a target. That is now playing out in many districts, especially with the crop already stressed. The hoppers can transmit the MRFV virus, which causes stunting and premature wilting of the corn plant.

March may have been a down month for corn futures, but it has been one-way traffic ever since, with only two minor red sessions in the December contract this month. The price has rallied from 452½ US cents per bushel (c/bu) on March 30 to be trading at 558 c/bu, as I write. That is a 23.3 per cent increase in the futures price in just 26 days. Since the contract low of 358¼ c/bu exactly one year ago, the price has risen 55.8 per cent. That is some rally!

Where does it end? The Brazilian safrinha crop issue won’t go away, and it could easily be more than 10MMT if the weather pattern doesn’t change for the better very quickly. In a normal year, such a production hiccup would typically be absorbed elsewhere. But we are not in a normal year. Global demand has skyrocketed, with special thanks to China, whose unrelenting buying spree has not as yet been tempered by the higher prices.

This will certainly boost export demand for US corn. The challenge here is that the forecast growth in US production for the 2021/22 season is predicated on a record yield projection of 179.5 bushels per acre (bu/ac). That is a 4.3 per cent increase on the 2020/21 yield of 172 bu/ac. Yes, the area is up slightly year-on-year, but most of that rise is in poorer yielding states in the north with slight decreases in some of the higher-yielding states throughout the corn belt.

Regardless of the production outcome in Brazil and the US, some serious rationing must occur. And it seems that will have to be outside of China. Of course, this has given wheat a whole new lease of life in recent weeks as it will need to be the global feed grain backstop. However, its capacity to fill the entire gap is being challenged of late, with northern hemisphere production issues of its own emerging in parts of the US, Canada, Europe and the Black Sea.

The corn market definitely has a bit of a Martha and The Vandellas flavour at the moment: Nowhere to run to, baby, nowhere to hide!

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

Nigeria’s people to pay for poor government policy…

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Nigeria’s Central Bank took to Twitter last Friday to announce the extraordinary step of cutting off the supply of foreign currency to importers of wheat and sugar. The embattled country is attempting to conserve US dollar reserves amid a domestic recession and spiralling foreign debt.

The Central Bank of Nigeria (CBN) was a big seller of hard currency in foreign exchange markets on Friday, pushing the Nigerian naira to a record 437.62 against the US dollar. And rising food costs continue to be the key driver of inflation, with the annual rate rising 1.6 per cent last month to 22.95 per cent.

The oil-rich nation relies heavily on food and agricultural imports valued at over US$10 billion annually to feed a population that recently soared above the 210 million mark. However, low oil prices and the ongoing COVID-19 lockdown restrictions have stifled Nigeria’s economy and increased borrowings. Revenue from oil and gas exports fund 90 per cent of the country’s annual budget.

Nigeria is Africa’s most populous nation and the continent’s biggest economy. In 2015 the CBN implemented a foreign exchange (FX) restriction list for 41 items it believed could be produced locally instead of imported. The currency controls were designed to ease pressure on the local currency amid a shortage of US dollars but instead led to skyrocketing inflation and further weakened the naira, making imports more expensive in local currency terms.

The list has expanded to 44 items in the ensuing years, with corn added in July 2020. In 2019 the government banned access to foreign exchange for dairy imports in a bid to stimulate domestic production. This infuriated industry groups arguing that domestic milk production was not enough to meet local demand. After months of discussion and protest, the CBN was forced to lift the foreign exchange restrictions in February 2020 for six firms to import milk.

According to the United States Department of Agriculture, Nigeria’s wheat production in the 2020/21 season will be a paltry 60,000 metric tonne. That equates to 1.2 per cent of domestic demand, which is forecast at 4.95 million metric tonne this marketing year. This is despite ten years of collaboration between the government, flour millers and farmers aimed at greatly reducing imports by increasing local wheat production to 50 per cent of domestic demand.

The Nigerian government collects a five per cent tariff on all wheat imports, plus an additional 15 per cent levy, which is earmarked for the national wheat development program. Despite Nigerian millers’ preference for imported wheat, the government is requiring millers to purchase local wheat at a fixed price of US$400 per metric tonne; well above international values.

However, the farmers prefer to sell their limited production to the Sahel countries to the north and non-government organisations (NGOs) who feed displaced citizens in the crisis-torn northern regions of the country where terror group Boko Haram continues to commit atrocities. According to the UN Refugee Agency, violence perpetrated by Boko Haram has affected 26 million people in the Lake Chad region and displaced 2.6 million of them since 2009.

The USDA has Nigeria pencilled in for wheat imports of 5.50 million metric tonne with around 500,000 metric tonne of exports, as wheat flour, to landlocked Sahel countries to the north, namely Niger, Chad and Mali. The import number is up 3 per cent on the previous year and is 18 per cent higher than the 2018/19 season.

With only 50,000 metric tonne of wheat going into domestic livestock rations, that means that 99 per cent, or 4.9 million metric tonne, of Nigerian wheat demand, is for human consumption. Around 70 per cent of the flour milled from wheat goes into food products such as bread, semolina, pasta and other wheat flour products.

Russia, the US., Black Sea exporters, The European Union, Canada and Australia are the major wheat suppliers to Nigeria, with relative prices and sea freight rates determining their market share from season to season. Larger exportable surpluses and lower prices out of the Black Sea region have increased the market share from that part of the world in recent years.

Nevertheless, imports of cheaper wheat from the Baltic states of Latvia and Lithuania have also grown as domestic millers try to reduce the price of flour and increase their profitability. The mills are blending the low-quality Baltic wheat with more expensive, higher quality, Hard Red Winter out of the United States.

Australian milling wheat is also popular with Nigerian manufacturers when prices allow. More than 300,000 metric tonne was exported to the West African nation in 2017 and 60,000 metric tonne was shipped in February this year.

The changing market dynamics have reduced the market share of US origin wheat from a high of 91 per cent of Nigerian imports in the 2010/11 marketing year to just 35 per cent in 2019/20. That said, Nigeria has consistently been either the second or third largest buyer of US wheat since the 2015/16 season, importing between 836,000 metric tonne and 1.09 million metric tonne annually.

Last week’s announcement by the government appears to be one more in a series of ill-thought policies aimed at reforming food production in Nigeria. This season’s wheat harvest is happening right now, and the next crop is not planted until November. The harvested area is estimated to be about 60,000 hectares which is relatively unchanged for the last six years and puts the average yield at just one metric tonne per hectare.

The domestic market cannot possibly react to the government’s new policy and feed the huge population without imports. If the government’s stated goal of 50 per cent self-sufficiency is to be achieved, it would require an additional 2.4 million hectares of land for wheat production using existing agronomic practices. This would mean a reallocation of corn and sorghum hectares, jeopardising Nigeria’s self-sufficiency status for those commodities.

The foreign exchange limit is a desperate move from a government rife with corruption and an abysmal economic management record. The policy will affect almost the entire population, and its people will simply be collateral damage if the policy is implemented. There will be a local reaction, but will it be enough to sway the policy makers?

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

Lower new crop wheat price regime confirmed…

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Global wheat offers have been on a slippery slide over the last month as confidence grows around new crop northern hemisphere production. This is especially the case in the Black Sea region, where early season concerns around dryness and late planting have been placated by favourable winter and early spring conditions.

The results of last week’s tender by Egypt’s General Authority for Supply Commodities (GASC) confirmed the much lower new crop price regime. It also asserted the Black Sea regions eagerness to get back in the game following the export tax confusion that has dominated market talk, and action, in recent months.

The market was quite surprised that Egypt issued a tender so close to their own harvest, which is expected to commence this week. The shipment period was also a surprise as GASC rarely tenders as far out the curve as they did last week. Speculation suggests this demonstrates confidence around domestic production, with the government hoping to procure 3.5 to 4MMT from local growers this season.

When the tender closed last Tuesday, GASC had received around 1.25 million metric tonne (MMT) of offers. There was 400,000 metric tonne of Russian wheat tendered, with all prices falling within a one-dollar range. No French wheat was furnished, but the cheapest offers from Russia, Ukraine and Romania were all within US$1.65 of each other, underlining the competitive nature of the new crop Black Sea market.

The lowest price was Russian origin at US$234 free on board (FOB) which is around US$230 FOB after additional GASC costs are taken into account. Nominally, this equates to around US$209 after the export tax is applied. The variable rate tax is currently set at 70 per cent of export price above US$200 FOB. Who knows what it will be by the time the grain is actually shipped, such is the uncertainty around the Russian government’s market intervention?

GASC ended up buying six cargoes totalling 345,000 metric tonne for August 1-10 shipment, of which five were Russian origin and one will be shipped out of Ukraine. The prices ranged from US$251 to US$252.75, including cost and freight (C&F), with the average price paid coming in at US$252.09/mt. This was US$45.31 cheaper than the average price paid for six Romanian cargoes in their last tender back on March 11 for April 15-25 shipment.

The old crop / new crop market inverse for wheat out of the Black Sea has been evident for some time, and once production concerns eased, new crop prices were always going to decline. However, this is still one of the largest downward moves GASC has witnessed between tenders for many years. It highlights the eagerness of Russian exporters to get some new crop sales on their books, despite the export tax burden and uncertainty.

The Russian Federal State Statistics Service, Rosstat, released its final 2020/21 production numbers last week, calling the national wheat crop a record 85.9MMT. Debate now revolves around the volume of exports, with the USDA raising its estimate by 0.5MMT to 39.5MMT in last week’s WASDE report. Leading agricultural consultancy SovEcon currently has exports pegged at 38.9MMT.

However, both are at the high end of estimates, with some in the trade as low as 35MMT. Either way, 2020/21 carry out stocks will increase compared to the previous season, with the USDA forecasting a 67 per cent increase to 12MMT and others as high as 17MMT. This will obviously add to new crop supplies and potentially increase Russia’s exportable surplus if the production outlook remains favourable through to harvest.

On the new crop front, SovEcon added 1.4MMT to its Russian production forecast last week due to vastly improved crop conditions in the country’s south. The updated estimate of 80.7MMt would be the third-largest crop on record, but it does come with a caveat around production concerns in Russia’s central regions, where crop health is mixed.

Favourable early spring weather and an optimistic forecast for the balance of April has consolidated Ukraine’s new crop wheat production estimate at 26.7MMT. This is smack on the average of the last six years. Even in the driest cropping districts, soil moisture levels are at or above the long-term average, which augurs well for crop development as the spring temperatures begin to rise in the second half of April.

The big sleeper in this whole Black Sea wheat supply equation are the rising tensions between Russia and Ukraine. They have been simmering since the illegal annexation of the Crimean Peninsula in 2014, but there have been several deadly clashes in recent weeks leading to a build-up of troops and tanks on the Russian side of the border.

As Ukraine is geographically divided between Europe and Russia, so too are the people divided; pro-Russian and pro-Western. Pro-Russian separatists also claim control over eastern Ukraine, including the Donbas region, which they have illegally controlled for the past seven years. It is not the impact on production that is a concern. It is the potential disruption to trade flows out of the Black Sea region if the conflict escalates.

The building expectation of a bumper harvest in the Black Sea region is weighing on Australian export prices. Russia is the world’s biggest exporter of wheat and the global export price setter. While Australia enjoys a substantial freight advantage into Southeast Asia, the substantially lower new crop Russian price means Australian export offers have had to adjust lower to compete with the aggressive Black Sea offers.

After enjoying prices in excess of US$300 C&F Indonesia earlier in the marketing campaign for Australian Premium White (APW) wheat, prices are quoted in the US$280 to US$285 C&F range for nearby business. But exporters have to compete with new crop Black Sea offers of US$270 to UD$272 C&F into Indonesia for July/August shipment.

With soil moisture conditions ideal for planting in Western Australia, New South Wales and Queensland, there is already potential for another big Australian crop. This will increase pressure to clear the exportable surplus from last year’s record crop necessitating competitiveness against new crop Black Sea exports in the second half of the year.

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

Welcome to the USDA’s hectare Houdini act…

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The United States Department of Agriculture stunned global grain markets yet again last week with the release of its quarterly US stocks report and the first draft of planting intentions for this year’s US corn and soybean campaign. These late March performances frequently challenge orthodox market judgement, and they certainly didn’t disappoint, with the ensuing frenzy sending futures prices sharply higher across the board.

In recent years, the stocks numbers have provided the major shock in this report, but last Wednesday, it was the corn and soybean seeding numbers that spooked the market. Both estimates came in well below market expectations, elevating concerns of global supply issues over the next twelve months.

With corn prices posting seven and a half year highs and soybean prices perched close to six and a half year highs going into the report, an overwhelming majority of market analysts had expected a record combined planted area in excess of 74 million hectares. But the USDA had other ideas, posting 72.34Mha collectively; 36.89Mha of corn, the most since 2016, and 35.45Mha of soybeans, the biggest plant since 2018.

The USDA’s wheat planting intentions number bucked the trend, coming in above market expectations at 18.76Mha. This compared to the average trade estimate of 18.2Mha and is up significantly from 17.93Mha planted last year, primarily due to an increase in the area seeded to winter wheat in the fall.

Despite the ‘limit up’ futures market reaction for both corn and soybeans, the USDA’s take on farmer planting intentions in 2021 was greeted with a high degree of scepticism. With the aforementioned higher prices and much better seeding conditions than this time last year, crop insurance payouts that guarantee profitability and strong global demand, there is plenty of incentive for the US farmer to maximise the area sown to row crops this spring.

The USDA will have a second crack at planting estimates when it posts the results of its early June farmer survey on the final day of the financial year. Expectations are already high for the area sown to both corn and soybeans to come in much higher than last week’s disappointing forecast, especially if spring planting conditions remain favourable.

But will that prospect be enough to relax domestic and global supply concerns over the next three months? The market sentiment is predicated on trend yields, and even if actual plantings for corn and soybeans are each up by 1Mha, the US balance sheet remains perilously tight. Any sniff of new crop yield issues, particularly in corn, and US rationing will be extreme. Remember, the USDA is still light on its corn export number to China.

In addition, historical precedent does not lend itself to significant upward revisions in the June report, especially of the magnitude required to meet the expectations analysts held for last week’s estimates. The last two years have seen downward area revisions for corn of 2.51Mha and 1.21Mha from March to June, and only once in the previous ten years was the final number revised up by more than 1Mha.

The historical trend for soybeans is even more challenging. There have only been four instances in the last 23 years where the June soybean area posted by the USDA was more than 1Mha higher than its March forecast. However, two of those years were on the back of a historically tight domestic balance sheet, just like 2021. That said, there have only been two years since 2009 where there was a downward revision, both due to poor seeding conditions.

In contrast to the spring planting intentions forecast, the USDA’s quarterly grain stock numbers came in refreshingly close to trade estimates; not that it provides any market relief. Total soybean stocks held on-farm and off-farm on March 1 were estimated at a five-year low of 42.57 million metric tonne (MMT). This was down more than 30 per cent, or 18.66MMT, from the far more comfortable figure of 61.23MMT at the same time last year.

The USDA pegged national March 1 corn stocks at an extremely bullish 195.62MMT. This is a 3 per cent decrease from a tick under 202MMT in 2020 and was slightly lower than the average trade estimate of 197.29MMT. Corn feeding in the US late last year and early in 2021 has been running at the highest level in three years. If that continues, some analysts are concerned the final carry out could fall below 25MMT (the magical 1 billion bushel barrier).

It seems that the tight soybean stocks and the favourable demand storey have not been enough to persuade US farmers to swing more corn area into soybeans this season. Growers are citing the importance of crop rotations to maintain long-term soil health and the strong domestic and export demand outlook for corn to support their argument.

And at current prices, consumers the world over are turning to food grains to plug their feed grain void. Corn cargoes are being replaced with wheat as the prices move closer to parity. The corn/wheat spread is approaching its eight-year low of US$0.44, encouraging wheat consumption at the expense of corn. The big advantage with wheat is the higher protein content allows feed grain rations to include less soybean meal to achieve the same nutritional outcome.

In China, the government has already auctioned more than 42MMt of wheat since June 22 last year for use in their domestic feed market. More recently, Beijing sold 9MMT of rice from state reserves, via the government auction system, specifically earmarked for feed channels to help combat high domestic corn prices.

There are numerous global production balls in the air right now, and the USDA added two more with their first cut on US spring planting intentions. There is very little wriggle room in the US row crop balance sheets. At the moment, there are supply alternatives for global consumers, but production hiccups in any region have the potential to be quite explosive for international markets. And northern hemisphere winter crop output could still upset the apple cart!

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

Modern-day “Suez Crisis” disrupting world trade…

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The Suez Canal is a crucial artery in world trade, but its operation suffered a major setback last Tuesday when one of the world’s largest container ships ran aground and blocked transit in both directions. The Ever Given was passing through the Suez Canal en route from the Chinese port of Yantian to Rotterdam, the largest seaport in Europe, when it veered off course in a single lane stretch of the canal, about six kilometres north of the Red Sea entrance.

The ship was occupying fifth position in a northbound convoy of 20 vessels when it was reportedly hit by a strong wind gust and dust storm near the village of Manshiyet, causing it to deviate from the intended route. However, the Suez Canal authority has since suggested that technical or human error may be to blame. When it came to a halt, diagonally blocking the canal, the bow was wedged firmly into one bank, and the stern was resting against the other.

At 399.94 metres, the Ever Given is one of the longest container ships currently in service and is operated by Taiwan based Evergreen Marine Corporation. Its hull has a beam of 58.8 metres, a depth of 32.9 metres and a fully laden draft of 14.5 metres. The vessel’s deadweight is just under 200,000 metric tonne, and it has a container capacity of 20,124 TEU (twenty-foot equivalent units).

A combination of dredging sand and mud from around the ship’s bulbous bow and pulling with as many as 14 tugboats to refloat the stricken carrier had limited success over the weekend.  However, following more dredging and favourable tidal conditions, the Suez Canal Authority announced that salvage crews had been successful in partially freeing the vessel just after 5:30am local time Monday.

The Ever Given was completely refloated at 3:05pm local time Monday, and traffic resumed in both directions shortly thereafter. Egyptian officials said that the backlog of vessels waiting to transit the Suez Canal should be cleared in around three days, but experts believe the knock-on effects on global trade will be felt for weeks, or even months.

More than 425 vessels were stalled at either entrance to the canal, including at least 60 dry bulk vessels carrying commodities such as grain, coal and iron ore. The list also includes container ships, oil tankers, LPG and LNG tankers, livestock carriers, general cargo ships, chemical tankers, and car carriers. The blockage is estimated to be delaying up to US$9.6 billion worth of cargo per day; US$5.1 billion northbound and US$4.5 billion southbound.

The Suez Canal is an artificial sea-level waterway connecting the Mediterranean Sea to The Red Sea via the Isthmus of Suez. It is 193.3 kilometres in length and essentially runs in a north-south direction from Port Said on the Mediterranean Sea to Port Tewfik, near the city of Suez, on the Red Sea. The canal divides the Asian and African continents as well as Egypt controlled Sinai Peninsula to its east from the Egyptian mainland to its west.

The canal took ten years to construct and was officially opened on November 17, 1869. It provides a more direct and faster route between the North Atlantic Ocean and the Indian Ocean, eliminating the need to navigate the long and treacherous alternative around the Cape of Good Hope. It reduces a ship’s journey from the Arabian Gulf to London by around 8,900 kilometres, or roughly ten days sailing time and saves up to 800 tonnes in fuel consumption.

An extension of the Ballah Bypass in 2014, to 35 kilometres in length, increased the canal’s two-way capacity, boosting the number of vessels that can pass through the waterway each day from 49 to 97. However, draft restrictions mean some supertankers still cannot transit fully laden, having to offload part of their cargo onto smaller vessels before entering and then reloading that cargo at the other end.

The Suez Canal saw around 12 per cent of world trade volume navigate its waters in 2020. A record 18,880 vessels traversed the waterway last year carrying a combined cargo of more than one billion tonnes and a combined value of more than US$1 trillion. Approximately 30 per cent of the world’s shipping container trade utilises the canal, with fees paid to the Suez Canal Authority totalling US$5.6bn last year.

Nearly 10 per cent of total seaborne oil trade, 20 per cent of global LNG trade and 16 million TEU passed through the waterway last year. According to the Suez Canal Authority, around 55 million metric tonne of grain is shipped via the channel annually. The vast majority of the grain traffic originates in the US, Europe and the Black Sea regions and enter the canal via the Mediterranean Sea on their way to destinations in the Middle East and the Far East.

In 2019 a total of 54.135 million metric tonnes of cereals transited the canal in dry bulk vessels, of which 53.043 million metric tonne, or 98 per cent, moved in a north to south direction. The total volume of oilseeds was 7.800 million metric tonne, with 5.908 million metric tonne, or 76 per cent, moving from the Atlantic basin to the Indian basin.

Data out of the US last week revealed almost 768,000 metric tonne of US inspected grain cargoes were on their way to Asian customers via the Suez Canal. Around 80 per cent of that was corn, 60 per cent of which was on six vessels destined for China. The other corn destinations were Indonesia, Saudi Arabia and Jordan. The remaining 20 per cent were a cargo each of sorghum, soybeans and wheat destined for China, Bangladesh and Djibouti, respectively.

The suspension of traffic through the narrow waterway has intensified problems for container shipping lines. They were already facing disruption and delays in supplying retail goods to consumers due to the coronavirus pandemic and pricing anomalies that have emerged in the global freight market in recent months.

The impact on energy markets is likely to be mitigated for a short time by subdued demand for crude oil and liquefied natural gas (LNG) as a result of the pandemic and the traditional low season. Additionally, stockpiles that have built up across the globe over the last twelve months will provide a short-term buffer. The Sumed pipeline can also pump 2.5 million barrels of crude oil per day across Egypt from the Red Sea to the Mediterranean Sea.

The uncertainty of passage meant dozens of bulk carriers, oil tankers and container ships have already rerouted via the Cape of Good Hope, adding substantial cost and more than a week to most journey times. Just a week into the crisis and the effects on global trade and sea freight rates have been building. However, freeing the vessel so quickly has avoided an exponential escalation in global shipping costs across almost all categories.

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

Hot sea freight market boosting Australian export opportunities…

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A significant spike in ocean freight rates, driven by strong demand for grain and coal vessels, is creating some turmoil in the dry bulk commodity market at the moment as consumers and the trade scramble to cover forward business.

The leading sea freight index on London’s Baltic Exchange closed higher for the third straight week last Friday, with charter rates for the larger capesize and panamax vessel segments rising for five consecutive sessions to close at 2,281, its highest level since September 2019.

Reports of a frenzy to secure panamax size, and smaller vessels, for the shipment of coal and grains in coming months pushed the main index 16 per cent higher across the week to cap the biggest five-day gain in four weeks.

The Baltic Dry Index (BDI) tracks freight rates for capesize, panamax and supermax vessels ferrying dry bulk goods across the world’s oceans. It is not only a reflection of the cost of shipping raw materials from supplier to consumer but also a real-time proxy of global demand for key commodities such as grains, coal and iron ore. It is considered one of the most important global economic indicators as it predicts future economic activity.

The panamax index, which accounts for 30 per cent of the BDI, is the best indicator of the cost of shipping grain. It advanced 153 points, or 5.4%, on Friday to close at 2,975, its highest since September 2010. That followed surges of 211 points, or 8.9 per cent on Wednesday and 239 points, or 9.3 per cent on Thursday. It was up almost 33 per cent for the week, the largest weekly gain since the week ending June 19, 2020.

The average daily earnings for panamax vessels closed last week at an average of US$26,773, a rise of US$6,595 over the previous Friday’s close. That equates to an increase of more than US$0.13 per metric tonne per day on a 50,000 metric tonne cargo. And the increase would be more significant on the high demand routes such as into China. Incidentally, this is more than two and a half times breakeven income of around US$10.200 per day.

Agricultural exports have been the biggest boost to the panamax and supramax segments in recent months. Soybean exports out of the US had a solid start to their season, with shipments in the first four months (September to December) hitting a record high of 39.6 million metric tonnes; China the primary destination.

Dry bulk shipments accounted for 93.7 per cent of this total, with the balance of 6.3% shipped in containers. This came on the back of extremely robust Brazilian soybean exports in 2020, up 12 per cent, or 83 million metric tonne, compared to 2019. And the rain-interrupted start to Brazil’s 2020 soybean harvest has delayed exports, with the huge vessel line-up reducing the availability of panamax vessels in the spot market.

Total Chinese soybean imports from Brazil and the US in 2020 hit a record high of 95.3 million metric tonnes. This is the equivalent of 1,906 panamax cargoes of 50,000 metric tonne, an increase of 296 consignments from 2019.

Most of the pressure on the global dry bulk shipping system emanates from China, with its enormous and growing passion for imported commodities such as soybeans, corn, wheat, coal and iron ore. Ironically, dozens of vessels laden with Australian coal lay idle off the Chinese coast awaiting discharge due to the ongoing trade dispute between Beijing and Canberra.

While the iron ore trade between the two nations remains unchallenged at this stage on the back of increasing demand from China’s steel industry, the coal trade has been severely disrupted. Total Australian coal exports fell by 94 million metric tonne, or 6.1 per cent, in 2020 compared to the previous year. This was primarily due to changes in China’s import policy, and to a lesser degree, lowered global demand due to the coronavirus pandemic.

The demand picture in the panamax segment of the market for the balance of 2021 hinges firmly on China’s appetite in the second, third and fourth quarters of the year. If Chinese consumers continue to buy agricultural commodities at record pace from South and North America, Europe, and to a lesser degree Australia, the availability of panamax vessels will stay tight for the balance of the year, and freight rates will likely remain high accordingly.

While seaborne trade in the Pacific basin only accounts for 22 per cent of grain exports, 58 per cent of global grain imports are in the Pacific, with South East Asia and the Far East the largest demand centres. Since the major grain export regions, such as Brazil, Argentina and the US Gulf, are in the Atlantic basin, the average distance the majority of grain vessels must travel is much longer than those out of Australian ports to the same destination.

The sizzling container market has also created some positives for dry bulk shipping globally. Some commodities often transported in containers are temporarily being transported as bulk cargoes, as boxes are becoming hard to secure and expensive. Some consumers who traditionally buy in containers are looking at bulk options due to extended container shipping delays and the potential for substantial savings in their raw material costs.

This is great news for Australian grain exporters, especially when we have a sizeable exportable surplus to clear. Being an island nation nestled in the south-west corner of the Pacific Ocean does have its advantages! The shorter distance to our key customers in Asia, relative to major competing origins, becomes our friend. Our global export reach is also extended in a rising freight market.

The pace of Australian exports has been solid over the last three months. However, it is behind where we need to be to clear all but stocks required to meet traditional inelastic demand in the second half of the year. Australia’s competitiveness has improved dramatically because of the rise in sea freight rates, which will be a critical competitive advantage as we go head-to-head with new crop northern hemisphere exporters from July onwards.

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

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