Weekly Commentary Archives | Grain Brokers Australia

Barley sales to China tightens domestic supply …

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China’s appetite for Australian feed barley appears to have been stoked in recent weeks with as many as six cargoes booked by the Middle Kingdom for nearby delivery.

The sales are reported to have been concluded at around US$220 cost and freight (C&F). This is in line with Chinese feed barley values of around US$210 C&F, taking into account the 3 per cent tariff benefit Australia enjoys over alternative origins and maybe a small quality premium.

The anti-dumping action may not have been resolved as yet, but barley sales have been made to China and cargoes unloaded since harvest. The pace of those sales is certainly well behind normal, but it seems Chinese importers, particularly those with government equity, are less nervous about making Australian purchases.

With the Australian grower around 90 per cent sold on barley, and the consumer only partially covered until new crop becomes available in October, it seems the merchants here are long. They are also growing in confidence concerning business with China and have been happy to take out the demand when it surfaced.

The other big barley news last week was the results of the most recent Saudi Arabian tender. The state-owned buyer, SAGO, booked 1.2 million metric tonnes of feed barley, against an initial tender of 720,000 metric tonne. The reason for the additional volume is unclear but increasing state reserves as global supplies and supply chains show signs of tightening, would seem a logical reason.

SAGO was seeking 480,000 metric tonne for delivery to Red Sea ports and 240,000 for delivery to Arabian Gulf ports with a vessel arrival spread from first half May to second-half June. In the end, they booked 840,000 metric tonne into the former and 360,000 metric tonne into the later ports.

The average price of US$201.04 was US$23.43 less than the previous tender. The average Red Sea port price was US$197.32 compared to US$222.42 in January, and the average Arabian Gulf price was US$209.71 compared to US$230.08 a few months ago.

If we call freight out of South Australia to Saudi Arabian ports US$20, then delivery to Dammam on the Arabian Gulf equates to around US$190 free on board (FOB) Western Australia, well under current replacement values. On the other hand, with freight to China as low as US$12, it pegs recent sales at around US$208 FOB Western Australia, which is supportive of current domestic values.

The tender was broken up into two halves, May and June, each with a first-half and second-half delivery window. The most likely origin for the majority of the tender will be Black Sea ports. The possible exception being the first-half and second-half May windows where a few Argentinian cargoes may make their way to Arabian Gulf docks.

Deliveries against the May demand must be old crop, but deliveries against the June demand can be new crop, with penalties applied for late delivery. A discount of one per cent of the price for each week the delivery is delayed is applied to the contract, with a maximum of six weeks delay allowed.

The May prices are in line with current Black Sea and Argentinian replacement values. However, with the inverse in the market, several exporters certainly took advantage of the ability to use new crop against the June sales. Some of the tender offers accepted for first-half June were discounted by around US$5 and second-half June by a further US$5, compared to the May offers.

Russia announced last week that it might limit exports of grain to 7 million metric tonne for the balance of the marketing year to avoid food shortages. The fall in the value of the Russian ruble against the United States dollar has put massive pressure on domestic supply, increasing local food prices considerably.

This action will impact wheat, barley, rye and corn. Offers disappeared when the possibility was revealed, but export values for wheat were nominally US$10-15 higher and barley US$5 higher by weeks end. If this sort of price action continues then the market will do the work of a potential export ban. Unlike Australia, the Russian grower is holding the long and the market just has rally enough to pry it from their very tight grip ahead of the next harvest.

European export values have rallied considerably over the last week. This is on the back of a rise in MATIF wheat futures values and tightening supplies. The French supply chain is also under enormous pressure due to a considerable export program and a spike in prompt domestic demand resulting from the COVID-19 pandemic.

Coronavirus may have spiked demand for wheat-based foods, but malting barley-based foods have been taking a caning. Worldwide beer demand has dropped as pubs and clubs across the globe are forced to shut their doors, and bottled beer sales are being hampered by a shortage of bottles.

The weaker Australia dollar has spurred export sales of wheat and barley into Asia. This appears to have caught some domestic market consumers napping as domestic prices increased at the same time, discouraging purchases. The wheat balance sheet is already tight based on the pace of exports and the shipping stem. Barley may not be as tight, but another rush of export sales will soon change that situation.

It is highly unlikely that the Australian government will contemplate Russian like restrictions of exports as a coronavirus food security measure. Rather, they will leave it to the market to allocate the limited grain resources to those consumers, domestic or export, who desire it most.

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

Plummeting ethanol grind eroding global corn demand….

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Chinese purchases of US grains have been quite scant since the coronavirus epidemic hit the country, despite the Phase 1 trade agreement being signed by both nations back in January. China pledged to buy an additional US$12.5 billion worth of agricultural goods in 2020 compared to the 2017 level of US$24 billion.

Many analysts have been expecting China to wait until the second half of the calendar year to ramp up purchases of US grains – when new-crop supplies come online, and prices are traditionally more competitive.

However, there were signs last week that China may be about to ‘walk the talk’ as the recent price declines bought US export values more in line with offerings from competing origins. Additionally, logistics issues and supply challenges across the globe are interrupting global supply. This has provided China with a valid incentive to engage the US exporter to spread its geographical supply risk.

The United States Department of Agriculture (USDA) announced last Friday that private exporters had reported sales of 756,000 metric tonnes of corn to China for delivery in the 2019/20 marketing year. This is the biggest corn sale to China since July 2013. Arrival must be before the end of June 2020, which is well before the US new crop slot.

Further private exporter sales across the week included 110,000 metric tonne of soybeans for delivery to ‘unknown’ destination’ in the 2020/21 season. Sales flagged “unknown destination’ typically mean China is the purchaser, and that was confirmed by the trade late in the week.

The USDA also reported deals totalling 340,000 metric tonnes of hard red winter wheat to China for delivery in the 2020/21 marketing year. This is the first Chinese purchase of hard red winter wheat from the US since late in 2017, just months before the US-China trade war got serious.

US corn futures plunged last week, despite the significant corn sale to China. The continued slide in crude oil values is a far greater challenge for global corn consumption. As coronavirus continues its global invasion, countries are increasing domestic and worldwide travel restrictions, sapping demand for fuel.

The price of Brent Crude has tumbled from a 2020 high of US$68.91 per barrel on January 6 and from US$51.90 per barrel at the beginning of March to close last week at a 17 year low of US$26.98 per barrel. That represents a loss in value of 61 per cent year-to-date and 48 per cent for the first three weeks of March.

Cheap oil is undermining the viability of the ethanol industry. The US accounts for 56 per cent of global ethanol production and manufacturers are feeling the pain as margins on the corn-based fuel slumped to record lows. The US mandates that ethanol is blended into the nation’s fuel pool. However, despite falling prices gasoline demand is being eroded by the national travel restrictions put in place to curb the spread of coronavirus.

Most of the industry is bleeding red ink right now, and there is no end in sight. Many ethanol plants in the US have slashed production over the past week or been forced to cut staff. Some have even closed to cut their losses until margins recover, whenever that may be!

Ethanol production in the US uses around 140 million metric tonne, or roughly 40 per cent of total corn production. There are reports that US ethanol grind may decline by 20 per cent. That equates to an annualised decrease in US corn disappearance of 28 million metric tonne and a significant increase in US ending stocks.

But who really knows how much production will decrease as demand is not being driven by price? The longer the national shutdown goes on, and it will be longer than most in the US care to admit, the bigger the decrease in demand.

And this is just the US equation. The low oil price will have a similar impact on ethanol demand and production in all jurisdictions, particularly those who mandate an ethanol inclusion in fuel or are major exporters of ethanol for fuel use. Non-US corn use for ethanol production is around 60 million metric tonne.

And corn is not the only feedstock. Brazil is the world’s second-biggest ethanol manufacturer, at 28 per cent of global production, and sugar is their primary raw material. In other countries, wheat, and even barley, are used, but the quantities involved are minor, relative to the size of the global crops. Ethanol yield from cereals also tends to be inferior to both corn and sugar, making the financial equation even less appealing with the price of oil so low.

All this erosion of corn demand comes as Brazil and Argentina are forecasting near-record corn harvests, despite the continued dry weather. Local agencies have maintained their production estimates, but parts of Argentina have certainly seen a yield reduction and the dry is slowing the planting of the second corn crop in Brazil.

Adding to the global feed grain glut is a potential record wheat crop in 2020/21. The International Grains Council pegged it at 769 million metric tonne, but market analysts are quoting numbers as high as 775 million metric tonne. Production that high means the world is building stocks even before any potential demand destruction by coronavirus.

With the 2020 winter crop planting season almost upon us, and plenty of uncertainty in global markets, now is the time to be looking ahead. The Aussie dollar has done its work for now, and there is good incentive to sweep the old crop cupboards bare. And if the soil moisture profile has been topped up by good summer rains, a modicum of production confidence may make new crop cover attractive at current values.

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

Grain market volatility here to stay for the moment…

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Global share markets staged a mini recovery on Friday as nervous investors looked to central banks and governments for support to counter the mounting economic costs of the coronavirus outbreak.

US stocks bounced sharply higher, most of it in the final 30 minutes of the session after Thursday’s trade saw the biggest single-day fall for Wall Street since Black Friday in 1987. And European shares, having notched the worst day on record on Thursday, registered moderate gains, but all finished well down on their intra-day highs.

Here in Australia, the S&P/ASX 200 recorded some of the most dramatic moves of the day. The index was down more than 7 per cent by lunchtime but rallied late in the day to close 4.4 per cent higher. This was after the Reserve Bank of Australia said it would funnel 8.8 billion Australian dollars into the lending market to help banks.

However, this bear market is not just about the coronavirus. Stock market valuations around the world, pumped up by low-interest rates, were already very high despite sluggish global economic growth.

Global debt levels are also higher in the corporate sector than they were in 2008. That itself would have eventually led to a reckoning in the stock market. The pandemic is now making this correction even more brutal.

Amid all of the turmoil, the US dollar has rallied quite dramatically, causing sharp declines in most global currencies. The Australian dollar traded down to 0.6122 on Friday, the lowest since November 2008, before closing the week one cent higher at 0.6224.

The “Aussie” finished the previous week at 0.6638 against the US dollar but closed at new lows each day last week to be down more than 4 cents, or 6.2 per cent in seven days. In fact, the trend has been downward since the New Year falling from a high of 0.7015 on December 31, a drop of almost 8 cents or 11.3 per cent year-to-date.

The Australian dollar is the fifth most traded currency in the world and is heavily exposed to Asian economies, China in particular. Australia is a significant exporter to China, and our economy and currency tend to reflect any change in the economic situation in that country.

And like the New Zealand and Canadian currencies, the Australian dollar is known as a commodity currency. Its value tends to move with the price of commodities as Australia’s economy is heavily reliant on exports of products such as iron ore, coal, precious metals and agricultural goods.

The AUD/USD pair often rises and falls along with the price of gold. In the financial world, gold is regarded as a safe haven against inflation, and it is one of the most traded precious metals, particularly in times such as we are experiencing at the moment.

But gold put in a shocker last week. After trading at multi-year highs, above US$1,700 per ounce on Monday morning, it lost a staggering US$170 per ounce in the next four and a half days as the yellow metal was pummelled, alongside crumbling equity values.

And there were three major forces at play: the wide-ranging commodity selloff, investor preference for sovereign US debt supported by the assumption of Federal Reserve intervention, and, most dramatically, a frantic rush to seize liquidity by selling any gold value for cash.

Foreign exchange moves have been instrumental in extending the generally low level of US grain prices. One of the enormous disservices that President Trump has inflicted upon the US farmer is pushing up the value of the US dollar, decreasing their ability to buy demand in a competitive export environment.

On the other hand, the fall in the Australian dollar value has been a godsend for Australian grain growers who have effectively been shielded from the recent weakness in global grain markets. It has increased the competitiveness of Australian grain, wheat and barley in particular, relative to our export competitors.

Since the July wheat futures contract on Chicago peaked at 590 cents per bushel on January 21, values have fallen by more than 14 per cent. The contract traded below the psychological 500 cents per bushel barrier on Thursday, the first time since September 30 last year.

In the Black Sea region, Russian export wheat values have been on the decline since peaking in late January. However, like Australia, the Russian farmer has been spared the real impact of that fall by a significant depreciation in their currency against the US dollar.

The devaluation of the Russian Ruble has been exacerbated in recent weeks by the oil price war that has erupted between Russia and Saudi Arabia following the breakdown of their pact to limit production. This has sent oil prices plummeting, another welcome bonus for the Aussie farmer as the winter crop planting season approaches.

The lower Australian dollar bought the buyers out in force last week, covering export sales and pushing values sharply higher. This supports the persistent rumours that significant export sales of both wheat and barley had been made in recent weeks, with China the primary destination.

Market volatility is here to stay for the moment, with the real effects of COVID-19 yet to be seen. It is definitely a time for caution and taking risk off the table. Sure, the exchange rate could go lower, but nobody knows how this crisis will impact global grain demand, and therefore prices.

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

Sorghum production forecast to be lowest in 50 years…

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What a difference a month makes. Substantial rainfall across the majority of nation’s winter and summer cropping regions over the last four weeks, on top of isolated storms in the preceding five weeks, has swung the mood across rural Australia from one of heightened pessimism to one of guarded optimism.

The vision on our television screens of flooded roads, overflowing gutters, children playing in puddles and farmers dancing in the rain have been a welcome distraction from the summer bushfires and the global coronavirus pandemic.

While there is still a long way to go, the general change to the weather pattern has growers and consumers across the country genuinely excited about crop prospects for 2020 and the possibility of a significant turnaround in domestic grain supply compared to the previous two seasons.

After such a prolonged dry spell, particularly in the eastern states, the soil moisture in many regions was at record low levels entering 2020. Replenishing those soil moisture reserves will be a long process with above-average rainfall required for a prolonged period of time.

The recent widespread falls have started the process of reducing the significant rainfall and soil moisture deficits accumulated over the last couple of years. However, despite substantial registrations in many locations, most were still below the long term average for the December to February period.

The rainfall has not been confined to the cropping regions. Drought affected pastoral districts have seen an unbelievable turnaround in pasture growth and feed availability. But most graziers were forced to substantially reduce stock numbers during the drought as the cost of maintaining livestock became prohibitive.

They are now looking to restock as quickly as possible to utilise the abundant forage. The challenge here is the rains have been so widespread that the demand for restocking quality sheep and cattle is unprecedented. It has forced the price of store stock in sale yards across the country to extraordinary levels.

Many livestock producers who have the option of planting a winter crop are looking to sow paddocks that haven’t seen a tractor for many years as the costs involved in buying stock make growing a crop a much better financial option this season.

Growers with mixed farming enterprises will almost certainly have an extra paddock or two allocated to winter crop when planting commences as their livestock numbers are well below normal levels. This means that the potential area available for winter cropping in the eastern states of Australia in 2020 will be substantially higher than in recent years. The potential for a big crop is building, but there is still a very long way to go.

Meanwhile, in Queensland and northern New South Wales, the limited area sown to sorghum this summer now has a genuine shot at achieving average yields, assuming regular rainfall continues for the balance of the growing season. It is extremely difficult to get an accurate handle on the actual area sown as the planting rains came so late. Suffice to say it was well below the total area growers intended to plant if the rains had been timelier.

At this stage, total production in Central Queensland, Southern Queensland and New South Wales are estimated to be 250,000 metric tonne, 125,000 metric tonne and 75,000 metric tonne respectively. That comes to a total of 450,000 metric tonne and would make it the smallest Australian sorghum harvest since the 1969/70 season.

One of the biggest challenges of a late sown sorghum crop in southern Queensland and northern New South Wales is the autumn/winter harvest. Getting grain moisture readings down to acceptable levels can be a challenge as the days are quite short, there is invariably a morning dew, and the daytime temperatures are much cooler. The harvest also tends to be occurring when the winter crop is being planted which strains farm resources and challenges management priorities.

In international sorghum news, the United States Department of Agriculture has revealed, via its daily reporting system, that China has purchased 110,000 metric tonne sorghum. The global trade has been waiting for news of grain sales to China as a sign that it was starting to fulfil the Phase 1 commitments it signed off on in mid-January.

Last week’s transaction is the first single sale of more than 100,000 tonne of any agricultural commodity to China since the trade deal was signed. As part of the continuous disclosure regulations in the United States, exporters must promptly report such transactions, commonly referred to as flash sales. Sales of smaller amounts only have to be reported on a weekly basis.

According to USDA export data, China has booked more than 475,000 metric tonnes of sorghum this marketing year. However, that total does not include sales of 325,000 metric tonne to ‘unknown destinations’ in the third week of February. Sales tagged accordingly are usually destined for China, and the trade is confident they were the buyer in this instance.

The USDA estimates that the US farmer planted 1.9 million hectares of sorghum last summer. This is 7 per cent lower than the previous two seasons and is well down on the peak of 6.7 million hectares back in 1986/87. Production in that year was just short of 29 million metric tonne, compared to 8.7 million metric tonne this marketing year.

China has been a traditional destination for Australian sorghum in recent years, particularly for the Baijiu market, But, one thing is certain, Australia will not be challenging the United States for bulk sorghum business into China in 2020.

World wheat production on the rise again…

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The International Grains Council (IGC) released their latest grain market report late last week, and global wheat production is forecast to set another record high of 769 million metric tonne in the 2020/21 marketing year. This compares to 763 million metric tonne expected to be produced in the current season, itself a record, being 1 million metric tonne higher than the previous mark set in 2017/18.

Australia alone could more than account for the projected increase in 2020/21 global production as a return to a more average season would see at least 10 million metric tonne added to domestic output. A repeat of the 2016/17 season could see almost 20 million metric tonne added to this season’s disappointing production outcome, especially considering the potential area earmarked for wheat following the back-to-back east coast droughts.

Since surpassing the 700 million metric tonne level for the first time in 2013/14, global wheat production has been steadily rising each year. The only hiccup was the 2018/19 season where production dropped to 733 million metric tonne, primarily due to production falls in Australia, Russia, Ukraine and the European Union.

IGC estimates that the harvested area for wheat in the 2020/21 global campaign will increase 2 per cent year-on-year to 221 million hectares. This is well below the harvested area record of 239 million hectares set way back in the 1980/81 season.

Global grain production has come a long way in the last forty years, thanks to the broad adoption of vastly improved agronomic practices. Back in the 1980/81 season, the world produced 450 million metric tonne of wheat. That represents an average global yield of 1.88 metric tonne per hectare compared to IGC forecasts of 3.52 and 3.48 metric tonne per hectare for the 2019/20 and 2020/21 seasons respectively.

The turnaround in this season’s world wheat production compared to the 2018/19 can primarily be attributed to improved production in the major exporting countries, excluding Australia. However, Indian production has increased to such an extent in recent years that it is now a potential net exporter, albeit in small quantities, in coming seasons.

India is the second-largest wheat producer in the world behind China. Early last week the Indian Agriculture Ministry released its grain production forecasts for the 2019-2020 season, in which wheat output is projected to be a record 106.2 million metric tonne. This compares to the 103.6 million metric tonne produced in 2018-19, the first time the 100 million metric tonne production barrier had been breached.

The expected bumper Indian crop can be attributed to two key factors. Firstly, the area seeded to wheat increased to record 33.6 million hectares, up 3.7 million hectares compared to last season and almost 2 million metric tonne higher than the previous record set in 2016/17.

Secondly, the excellent monsoon season delivered 10 per cent more than the Long Period Average of 880 millimetres of rainfall. As a result, yields are expected to average close to 3.2 metric tonne per hectare, well above the national long term mean. With the Indian harvest commencing this month, progress will no doubt be monitored with increased interest by the global trade.

On the demand side of the equation, world carry-out stocks are expected to increase in the 2019/20 marketing year. The IGC has forecast global wheat consumption at 753 million metric tonne, up 2 per cent on 2018/19, resulting in a 10 million metric tonne increase in stocks at the conclusion of the current marketing season on June 30.

However, the devil is in the detail as this increase will more than likely reside in traditional non-exporting countries such as India and China. Ending stocks in the major exporting countries are expected to decrease to around 67 million metric tonne, a year-on-year fall of more than 4 per cent.

Meanwhile, Saudi Arabian milling wheat demand continues unabated with the state grain buyer, SAGO, booking 715,000 metric tonne for second-quarter. It booked 360,000 metric tonne for Jeddah delivery at an average price of US$243.25, an increase of US$3.35 on the previous tender back in October last year.

The average price for the 300,000 metric tonne booked for Dammam delivery was US$253.00, up US$5.28 on the October price. SAGO also booked one panamax for delivery to the southern Red Sea port of Jazan at US$245.39. While the prices were higher than the last tender, they are much lower than if the tender had been issued in January.

However, the more interesting tender result released last week was the Philippines who purchased 275,000 metric tonne of optional origin feed wheat for May to July delivery. The May price is reported to be around US$238 cost and freight (C&F), the June price around US$228 C&F and the July (new crop) price around US$218 C&F.

The majority, if not all, of the wheat is expected to be executed from the Black Sea. The only position where Western Australian values get close is May. But even then, last week’s grower bids suggest domestic wheat would still be at least US$5 out of the money unless the exporter owns elevation assets and is willing to discount the pipeline.

Additionally, the spread between the May and July prices is a reflection of the old crop/new crop inverse that currently exists in the Black Sea export market. While old crop Black Sea prices have been falling in recent weeks, so too have new crop prices at almost the same pace meaning the inverse has only narrowed slightly.

Mixed fortunes for Canadian farmers…

Rail blockades hindering Canadian grain exports…

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Rail blockades across Canada continue to paralyse grain movements, leaving export grain stranded on the nation’s Prairies and slashing grain export income by as much as US$7 million per day from lost sales, contract penalties and demurrage.

In early February protesters set up blockades east of Belleville, Ontario, and west of Prince George, British Columbia in solidarity with Indigenous leaders from the Wet’suwet’en Nation who oppose construction of a natural gas pipeline. Wet’suwet’en chiefs claim the proposed pipeline would run through the hereditary land of their people.

The blockades have since sprung up at several strategic locations across the country disrupting most key rail corridors bringing both passenger and freight train services to a grinding halt.

They have cut off critical crude-by-rail shipments to three eastern refineries that account for about a third of the country’s refining capacity. And farmers who rely on propane to heat livestock barns during the winter and keep animals comfortable are having to ration their supplies because of the blockades.

The dispute has struck a chord across the country and led to widespread protests that are about far more than the future of a single pipeline. It is giving voice to those who believe the Trudeau government is not delivering on its pledges to take climate change more seriously and transform its relationship with Canada’s indigenous people, who make up about 5 per cent of the population.

This is the latest crisis to face Justin Trudeau at the start of his second term as Canadian prime minister. After spending days calling for talks and making clear he didn’t want police to dismantle the blockades by force, Trudeau’s tone hardened late last week. He demanded aboriginal protesters lift the rail blockades that are hurting the economy and made it clear police would, if necessary, enforce injunctions to remove the obstacles.

About 94 per cent of Canada’s grain exports travel to port by rail on an annual basis. The blockades are further impeding grain shipments that already faced severe backlogs stemming from a delayed harvest and a week-long strike at the Canadian National Railway Company back in November last year.

According to data released by the Canadian government last Friday, wheat exports from all ports were less than 174,000 metric tonne in the week concluding Sunday February 16, down 37 per cent compared to the previous week and 28 per cent below the five-year average. Shipments of wheat from Vancouver, Canada’s main grain export hub, fell 68 per cent to 44,200 mt while exports from Prince Rupert decreased from 77,000 mt to zero.

The latest weekly grain monitoring report stated there were 40 vessels lined up at the port of Vancouver and ten at Prince Rupert as of February 16. The Vancouver line-up compares with the average of 24 vessels for the port, while the yearly average at Prince Rupert is only five. Eight grain vessels were cleared to sail from Vancouver in week 29 of the Canadian grain shipping calendar, but none from Prince Rupert.

The blockades are not only disrupting the passage of grain to port for export but seriously impeding each rail company’s ability to reposition empty rail cars back upcountry for loading. This has led to a sharp increase in upcountry elevator stocks. Growers have been delivering as arranged with exporters, but the grain is not being railed out of the sites at the same pace.

The effects on the Canadian farmer is real. As elevators fill up, growers have to stop delivering, and they don’t get paid when they are unable to deliver their grain. This may lead to a financial squeeze as farmers need the money to cover the costs to seed and fertilise the upcoming spring crop,

The ships currently waiting at anchorage put the 2019/20 shipping season on track to match the disastrous winter of 2013-14 for grain shipments. Agriculture and Agri-Food Canada’s February supply and demand estimates included a 400,000 metric tonne drop in exports of the grains and oilseeds for 2019-20.

The blockade comes at a time when grain sales, in particular wheat, have been booming into Asia. Canadian wheat sales to China were at a 14 year high in 2018/19, and the trend has continued this season. This is in stark contrast to canola, where the continuing trade dispute between the two countries has stymied the traditional trade flow.

The increased wheat enquiry from China is really by necessity. China needs to fill a void created by the long-running trade war with the United States and lower than normal exportable surpluses out of Australia after back-to-back droughts on the east coast. They have also purchased French wheat in recent weeks.

Sales of Canadian wheat have also been increasing to countries such as Indonesia, Philippines, Thailand, Vietnam and South Korea. The dynamic has changed to such an extent that in the 2019/20 marketing year Indonesia was Canada’s biggest global wheat customer. Their exports to Indonesia totalled 2.28 million metric tonne, almost double Australia’s shipments to the same destination.

Sales of Australian wheat to China have continued in recent weeks. However, with a smaller exportable surplus this season compared to last, the cupboard will be empty very quickly. This will frustrate our ability to take advantage of Canada’s grain export woes and clawback traditional Asian demand, particularly for Australian wheat.

Ongoing strikes slowing French exports…

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Ongoing strikes in France over pension reform are disrupting the country’s rail services and port activities, and have the potential to severely impact the grains sector if a quick resolution is not found to the dispute that has now been running for almost eight weeks.

Like so many countries in the developed world, France is wrestling with how to fund its relatively generous pension schemes amidst falling birth rates and an ageing workforce. The country’s hard-left trade unions are trying to force President Emmanuel Macron to abandon the biggest overhaul to the French pension system since World War II.

France has 42 different pension schemes, each with varying levels of contributions and benefits, and Macron wants to streamline them into a single system that gives every pensioner the same rights for each euro contributed.

At just under 14% of economic output, French spending on public pensions is among the highest in the world, a vital component of an expensive but treasured welfare state. The government says the new system would reduce billions in future deficits in pension funds.

The public transport strike that has stymied rail freight services and a series of rolling stoppages by stevedores have left merchants struggling to get wheat and barley to port for export and to domestic consumers across the country.

According to the French grain organisation Intercereales, the situation is now getting quite drastic. There are more than 450,000 metric tonnes of grain, worth around 100 million euros (AU$166 million), blocked in French ports, unable to be loaded onto export vessels that are lined up at anchorage off the French coast.

The strikes are paralysing this season’s grain marketing campaign in the European Union’s biggest grain producer. The big concern now is that merchants will be forced into loading optional origin sales via alternate export pathways out of competing countries to meet their contractual obligations.

Additionally, buyers are reported to be switching purchases to other exporting regions such as northern Europe, Baltic countries, the Black Sea, the United States or Canada to avoid the possibility of getting squeezed on delivery due to inadequate logistics. This was evident in the latest Egyptian tender, where there was only one French offer, and all the business went to Black Sea exporters.

France harvested 39.5 million metric tonne (MT) of soft wheat this season (July 2019 to June 2020) it’s second-largest crop on record, and up 16 per cent on the drought reduced 2018/19 crop. Before the strikes, current season exports outside of the European Union were estimated to reach more than 12MT, a four year high and up 14 per cent on 2018/19.  

The grain industry in France is extremely reliant on rail freight to execute the massive grain transport task from interior storages and railheads to ports around the country each season. It is estimated that road freight costs an additional 4 and 6 euros per tonne depending on the distance to port, effectively reducing France’s competitiveness in the global marketplace.

That said, French 11.5 per cent protein wheat is quoted at US$224 Free on Board (FOB) for a February loader, maintaining its discount to Black Sea values which closed last week quoted at US$229 FOB.

German and Baltic export premiums have been strengthening against French wheat values as domestic merchants and exporters look for alternate European Union supplies in the wake of the French crisis. They closed the week quoted at around US$228 and US$227 respectively for 12.5 per cent protein wheat. If you call the 11.5 per cent protein discount $3, they remain quite competitive and provide a cheap means of avoiding the French system.

All this comes at a time when French exporters were hoping to rebuild their export clientele after a poor production year in 2018/19 reduced the exportable surplus, forcing traditional wheat customers to other origins. France had a rare shipment of wheat to China at the beginning of the season, and traders are hopeful French wheat will regain market share in West Africa and catch extra demand from Morocco, which had a poor harvest.

On the barley front, France harvested a record 13.6MMT off 1.9 million hectares in the current season. This was up 2.5MMT or 22 per cent compared to 2018/19 and restores quite a healthy exportable surplus.

In terms of quoted export values, French barley remains extremely competitive. It closed last week at around US$191 FOB compared to Black Sea replacement at around $192 FOB and German at around US$195 FOB.

The latest Saudi tender results will be out early this week, and at those values, it is hard to see exporters shorting French execution with the current industrial turmoil. German barley is more expensive and has a freight disadvantage, so it is highly likely the business will go to Black Sea nations unless the Argentinians decide to pop their head in for a look.

Major reform is always difficult in politics, especially when it potentially affects the majority of the country’s constituents. The unions in France hold a lot of power and finding a resolution could be drawn out.

We also know how militant the French farmers can be when they are riled. It will be fascinating to see what action they take and what influence It has when the strikes start to materially affect their farm income and profitability.

USDA welcomes the New Year with very little fanfare…

Posted by | USDA WASDE Report, Weekly Commentary | No Comments

Released late last week, the January World Agricultural Supply and Demand Estimates (WASDE) report tends to be quite significant, given that it’s usually the final numbers in terms of yields, harvested area and production for the crop year in the United States (US). 

However, the case is not closed on 2019 US production just yet as the United States Department of Agriculture (USDA) acknowledged it would resurvey producers in Michigan, Minnesota, North Dakota, South Dakota and Wisconsin for corn production and Michigan, North Dakota and Wisconsin when it comes to soybean production.

Heading into last Friday’s release, much of the market chatter suggested that the report would be bullish, based on the expectation of lower summer crop yields. But the opposite happened with the USDA raising the national yield for both corn and soybeans.

US corn production was forecast at 347.7 million metric tonne (MMT) with an average national yield of 10.55 metric tonne per hectare (mt/ha), slightly higher than last month’s yield estimate of 10.48mt/ha.

Globally, corn production in South America was left unchanged by the USDA with Brazil and Argentina forecast to produce 101MMT and 50MMT respectively. These numbers seem to belie the dry conditions being experienced in many parts of Brazil and Argentina this summer.

The only production increase amongst the major exporters was Russia which the USDA increased by 0.5MMT to 14.5MMT. The washup of all the changes was an increase in global output by a little more than 2 MMT to 850MMT excluding China, and 1,111MMT including China.

However, the bullish part of the corn equation comes in the demand number, increased by more than 6MMT globally compared to the December report. The US accounted for just under 6MMT with a 1MMT increase in China countered by a 0.5MMT decrease in Ukraine and several other minor downward revisions.

The USDA pegged final 2019 US soybean production 90.4MMT, on an average yield of 3.19mt/ha compared to 90.2MMT and an average yield of 3.15mt/ha in the December report. This was a surprise to most analysts who expected to see the impact of the extremely challenging season continue to ripple through the country’s soybean supplies. Nonetheless, this is still 20 per cent lower than the previous season’s production of 112.5MMT.

Like corn, the South American soybean production numbers remain steady with Brazil estimated to produce 123MMT this summer and Argentina expected to harvest 53MMT. Brazil’s National Supply Company (Conab) released estimates last week that seem to ignore drought worries and support the USDA number. They are forecasting soybean production at 122.2MMT off 36.8 million hectares.

Eventually, soybean losses will happen if it remains dry, but most agronomists believe that the current lack of moisture only affects the first corn crop at this point in the season. The state raising the biggest concern is Rio Grande do Sul, the top summer corn producer in the country. Conab maintained its estimate for first crop corn production at 26.6MMT, down 3.8 per cent compared with 2019, based on a 1.1 per cent increase in the seeded area.

When it comes to wheat, global production for the 2019/20 marketing year was reduced by a meagre 1MMT to 764.4MMT. Half of that decrease was in Australia, where the USDA decreased production by 0.5MMT to 15.6MMT. While this is getting closer to reality, it is still at least 1MMT higher than the majority of domestic estimates.

Argentine production remained at 19MMT against the latest Buenos Aires Grain Exchange (BAGE) estimate of 18.8MMT. BAGE increased their estimate by 0.3MMT last week on the back of better than expected yields in the late-harvested regions. The balance of the global production decrease was in Europe with the Russian crop decreased by 1MMT to 73.5MMT and the European Union (EU) crop increased by 0.5MT to 154MMT.

On the wheat export front, global trade for the 2019/20 marketing year was increased by 1.3MMT to 181.1MMT. The US, Argentine and Canadian numbers were all unchanged compared to the December report. The major tweaking was in Europe where the Ukrainian and EU export numbers were increased by 0.5MMT and 2MMT respectively, and the Russian forecast was decreased by 1MMT on the back of lower supplies.

The USDA adjustment to the Australian wheat export number was hardly worth the token effort with a mere 0.2MMT shaved off expectations. Like the production forecast, the figure of 8.2MMT is at least 1MMT higher than most domestic expectations, and it simply should not be possible given domestic demand and the poor harvests receivals in Western Australia and South Australia.

Looking at the US new crop, the USDA reckons their farmers have planted 12.47 million hectares of winter wheat. This compares to 12.61 million hectares last year and is the smallest winter wheat area since 1909.

On the barley side of the equation, global production was decreased by 0.7MMT to 156MMT up more than 12 per cent, or 17.4MMT compared to the 2018/19 season. Australia was down 0.2MMT to 8.2MMT, EU up 0.5MMT to 62.75MMT and several minor producers collectively down by 1MMT.

The net change to global demand was minor at 0.1MMT, but the USDA did make some quite hefty regional adjustments to arrive at total demand of almost 153MMT. The big one was a 0.9MMT decrease in Chinese demand, potentially decreasing Australian exports over the coming months.

Countering that were demand increases of 0.4MT in the European Union and 0.6MMt in Turkey. Most importantly, Saudi Arabian demand was untouched at 8.5MMT, a year-on-year increase of 20 per cent or 1.5MMT. All this leaves 2019/20 global ending stocks at just under 21MMT, down 1MMT on last season’s number.

It could be said that last week’s WASDE report was mildly bullish for wheat, barley and corn, but on the whole, it was quite underwhelming for a report that invariably has huge trade and market ramifications.

Read the full USDA report here.

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