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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pakistan overachieving in the wheat import space…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Russian harvest winding down as the planting program accelerates…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

No fireworks from the USDA this month…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Egypt buys but Russia misses the prize…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EU harvest adds to the global wheat dilemma…

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The winter crop harvest is winding down across much of Europe despite the challenges presented by weather extremes that have hampered field activities in a number of countries and played havoc with crop quality.

Harvest rains and quality issues have been observed across most of France, the western parts of Germany and large parts of Poland. The wet weather did extend further west into Belarus and south as far as northern Italy, but impact on crop quality was not as drastic. In the north of the continent, a hotter than usual July in Sweden, the Baltic states and Finland affected grain filling of spring and winter cereal crops as soil moisture ran out early.

According to last week’s European Commission crop update, soft wheat production is forecast at 127.2 million metric tonne, down from 127.7MMT in July. This was on the back of a slight reduction in yield from an average of 6.05 metric tonne per hectare (MT/ha) to 5.98MT/ha. However, this yield is still 7.9 per cent above the 2020 harvest number of 5.54MT/ha and 5.1 per cent above the five-year average of 5.69MT/ha.

Despite the production downgrade, the Commission maintained its European Union wheat export outlook at 30.0MMT for the 2021/22 marketing year, which commenced on July 1. On the oilseed front, the Commission reduced 2021/22 canola import projections by five per cent from 6.0MMT to 5.7MMT, even though its European Union production forecast remained unchanged at 16.9MMT.

Conversely, the production estimate for winter and spring barley collectively was increased slightly from 52.6MMT to 52.9MMT. The forecast yield jumped from an average of 4.96MT/ha to 4.99MT/ha, 4.4 per cent above the five-year average of 4.78MT/ha but only 2 per cent above last year’s yield of 4.89MT/ha.

French farmers have almost completed this year’s wheat harvest, but it is running two weeks behind the pace of the 2020 edition and 11 days behind the five-year average. Last Friday, farm office FranceAgriMer pegged the soft wheat harvest at 96 per cent complete as of August 23, up from 91 per cent a week earlier after a two-week hot spell allowed fieldwork to pick up following the rain disruptions earlier in the program.

Agriculture consultant Agritel has dropped its French wheat production estimate below 35MMT following a survey conducted among French farmers. Agritel is now calling the crop 34.93MMT, down from 37.9MMT following their July survey. The harvest rains have drastically affected grain quality, with test weight taking a hit. As a result, the average yield expectations have dropped from 7.60MT/ha to 7.07Mt/ha.

Test weight measures grain density and is a critical determinant of quality suitable for the milling industry. Most millers require a minimum of 76 kilograms/hectolitre (kg/hl), while stockfeed consumers tend to request a minimum of 72 kg/hl, or even as low as 70kg/ha. This suggests that French exporters may struggle to meet the quality of their long-term buyers in north Africa, with stockfeed buyers in the Middle East and Asia likely alternatives.

The winter barley harvest in France has long concluded, but the spring version is lagging the long-term average on account of the wet weather. FranceAgriMer called the spring barley harvest is 97 per cent complete last week compared to 100 per cent a year earlier. Reports suggest that the spring barley crop withstood the wet harvest conditions and quality remains satisfactory, and there will be ample supply to meet domestic malt demand.

According to the German agriculture ministry update last week, total wheat production in Germany is forecast to fall 3.36 per cent year-on-year to 21.37MMT following the wet harvest. Weather extremes punctuated the German season with a cold spring leading into a hot, dry start to the summer. And when the harvest started, uninvited summer storms delayed the harvest and reduced crop quality. Nonetheless, the quality issue is not as bad as in France, with German wheat said to be replacing French supplies into overseas markets, including major customer Algeria.

The poor harvest weather has also impacted canola yields, with production now forecast to increase by only 0.2 per cent over 2020 to 3.52MMT, 11.3 per cent below the five-year average. This compares to the agriculture ministry’s upbeat May production forecast of 3.8MMT. On the other hand, barley production is bucking the trend, with output expected to be 2.2 per cent higher than last year at 9.0MMT.

Wheat production in Poland has also taken a hit due to heavy rains over the harvest period. According to local consultant and analyst Sparks Polska, the country’s wheat production forecast is now 11.9MMT, down from their July estimate of 12.1MMT and just below last year’s mark of 12.0MMT.

In Belarus, the government has imposed a six-month grain export ban following a poor, weather interrupted harvest. The ban will be valid for six months and applies to the export of wheat and meslin, rye, barley, oats, corn, buckwheat, millet, triticale, other cereals and canola outside the Republic of Belarus. The country has completed its 2021 harvest, delivering 6.2MMT of grain, a 14 per cent decrease on the 7.2MMT reaped in 2020.

The European Union Black Sea states of Romania and Bulgaria have bagged bumper wheat crops this year, a huge turnaround from their poor showing in 2020. Romania has harvested a record 11.4MT, more than 78 per cent higher than the 6.4MMT reaped in 2020. A highly favourable growing season delivered a record yield of 5.34MT/ha, more than 11 per cent higher than the previous record of 4.8MT/ha. The Romanian barley crop was also a bumper at 1.9MMT, 73 per cent higher year on year.

The wheat harvest in Bulgaria was 98.7 per cent complete as of early last week, and the local farmers had bagged 7.1MMT, 51 per cent higher than a year earlier. The average wheat yields have averaged more than 6.0MT/ha, a welcome improvement on the drought-affected 4.0MT/ha produced off a much lower harvested area in 2020. Bulgaria’s barley crop has also recovered from last year’s debacle, up 25 per cent to 0.7MMT this year.

It has certainly been an eventful harvest for the European farmer this year. While wheat production may be higher than in 2020, quality issues will present challenges for both domestic consumers and export supplies.

However, this is not unique to Europe. The world has both a wheat production and protein wheat deficit to solve, particularly amongst the major exporting nations. Some serious rationing will be required to balance the books, but the global consumer has only just read the headlines. Higher prices are here to stay for some time yet, it seems, and the burden on Australian wheat production and exports over the next twelve months will be extremely high.

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

To swap or not…

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Written by Brendan Dart, Dartboard Commodities Pty Ltd.

Grain swaps have been a popular marketing tool for farmers and traders over the years. On the surface, they are relatively easy products to use, and in many cases, can be very valuable marketing tools.

So, what are the dynamics of entering swaps and what are the benefits of using them? The answer to this is far from straightforward. It needs deeper digging to determine the individual farmer requirements and risk profiles and understanding if the broader market environment looks favourable for swap products.

A swap typically involves selling (or buying) a futures contract on another exchange and converting it into Australian dollars. Using wheat as an example, a typical swap product would involve selling a Chicago futures contract and converting it to AUD to obtain a local wheat price.

The process is simple enough, but it is not without risks. Multiple factors should be considered prior to entering into swap products:

  • The individual farmer’s risk profile
  • The local conditions and production risks.
  • Local market dynamics – what are the factors driving local values?
  • Global market relativity – How do Australian values compare with global values?
  • Global market dynamics – what are the factors driving global values? This is a broader risk discussion but essential to determine if swaps are appropriate from a risk perspective.

The key driver for using swap products is typically to mitigate local production risks. Forward selling physical grain in dry seasons can leave farmers vulnerable to market volatility. Recent seasons in Australia have highlighted this point very clearly.

The 2018/19 and 2019/20 domestic grain seasons were notable for severe drought conditions across much of the east coast, which decimated grain production and created significant domestic supply issues. This caused a surge in local grain values whereby Australian domestic premiums traded well above global benchmarks to such an extent that sizeable volumes of grain were shipped from Western Australia and South Australia to east coast ports to cover our domestic deficit.

The local market dynamics prevalent throughout these two seasons were ideal for farmers to use swap products, as local prices outpaced global values. This enabled farmers to have some sales in place and mitigate some of the local production risks and subsequently maintain exposure to the local market strength driven by the east coast drought conditions.

However, the 2020/21 season saw Australian production return in style, particularly a substantial rebound to record production across parts of the east coast. This was a fantastic result for both grain farmers and the Australian grain industry. Of course, the main downside to this was a weakening of grain values in Australia relative to global values. The 2021/22 season is also shaping up nicely with some favourable conditions during the early part of the season, which has seen domestic values lagging global markets.

The local market dynamics that we saw last year, and are again unfolding this season, are quite the opposite to the 2018/19 and 2019/20 seasons. Whilst they are not necessarily bad for swap products, the market structure is different and bears examination. While Australian production is ticking along quite nicely this season, the global balance sheet appears to be tightening significantly, elevating the risks around swap products to some degree.

Global market dynamics are changing. In particular, much of the change has been due to production losses inflicted across the major exporter zones of Russia and North America. In addition to losing around 18mmt of production, we have also seen some quality issues in Europe, which has further tightened the supply of milling wheat across the major exporters. As a result, global wheat values have been driven higher, widening the spread to those seen in Australia.

Adding further fuel to the fire is the fact that Russia, the world’s largest wheat exporter, has imposed a floating export tax which has completely distorted export values in the region and, in many respects, largely taken Russian exports out of play. While a healthy supply of wheat still exists in Russia, it is not realistically available for the market today.

The market dynamics in North America warrant particular attention for swap sellers When there are significant production issues in the region risks will elevate, given that the majority of swap products are traded via the Chicago futures exchange. A tight balance sheet in the US market creates a situation where the US futures markets can trade for an extended period at elevated levels. This can skew the value of swap products and add significant unwanted risk in extreme situations (think 2008).

The US and Canada have collectively lost 13.5mmt of wheat production since the June WASDE report, which has tightened domestic stocks to multi-year lows. The global market is trying to understand if they will need additional exports out of the US to cover the potential shortfall in global milling wheat stocks. This equation is far from clear, with global demand yet to be fully determined. However, risks remain in play, and it is likely the market will trade cautiously. US futures values can remain high for much of the season, or until such time as we get increased clarity around global demand.

The bottom line here is that risks have increased for swap sellers this season. Global wheat values have rallied sharply over the past six weeks, and while Australian values have also rallied, we are lagging the global market noticeably. The sudden rally in wheat values has caught many global consumers by surprise. It will take time for the market to adjust to these higher values, or alternately, to start rationing elastic demand.

The challenge for swap sellers today is that the global market has not yet found equilibrium, and risks can remain elevated for some time. Global wheat demand remains unclear, and this will ultimately determine how tight we get for global stocks and where wheat values will need to trade to balance supply. If global milling wheat demand remains strong against tightening supply, there are upside risks for wheat markets.

Ultimately, futures prices can easily outperform physical markets in a bull market, creating additional risks for swap sellers. Therefore, in the current environment, some caution is warranted.

* The information contained in this article is general advice only. There is significant risk associated with trading futures and derivative products.

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

The USDA slashes global wheat production…

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The global wheat market was thrown on its head last week following the release of the latest World Agricultural Supply and Demand Estimates report. The USDA binned the measured approach and took the knife to wheat production estimates in many of the world’s key exporting nations.

The trade has become accustomed to surprises from the USDA, but it has been more for its delayed reaction to production signals across the globe. That can’t be said of this month’s report, and global markets reacted accordingly.

The Chicago Board of Trade December 2021 wheat contract settled US$3.58 per metric tonne higher on Friday to finish the week at US$284.58/MT, the highest close on a continuous chart of the most traded CBOT wheat contract since February 2013. That was 6.8 per cent higher than the previous week’s close of US$266.48/MT, and 24.2 per cent higher than the most recent contract low of US$229.19/MT set on July 9.

The Paris based Euronext December wheat futures set fresh contract highs on Thursday following the release of the WASDE report and again on Friday as the trade continued to digest the enormous reduction in global production. The benchmark December contract closed the week at €254.25/MT. That was 9.5 per cent higher than the previous Friday’s close of €232.25/MT and 27.4 per cent higher than the most recent contract low of €199.50, similarly set on July 9.

Unsurprisingly, Black Sea export values have been on fire. Russian 12.5 per cent protein closed the first week of the month at around US$270 free on board for September shipment. Last Friday, the same wheat was quoted at around US$295FOB, with 11.5 per cent protein offered at a US$10 discount and feed wheat another US$10 lower. Many exporters, traders and domestic consumers entered the harvest period on the short side, but the dramatic drop in the production outlook has spawned a mad scramble for cover.

According to the USDA, the month-on-month global wheat outlook for 2021/22 is for reduced supplies, lower consumption, reduced trade, and smaller ending stocks. It slashed global production by 15.5 million metric tonne, or almost 2 per cent, to 776.9MMT with significant production downgrades in Russia and Canada. This puts the current world wheat estimate just 1MMT higher than 2020/21 production.

A month ago, analysts were talking up the Russian crop with estimates of 85MMT and higher commonplace. But a month is a long time in grain markets, and last week the USDA reacted to news of disappointing early harvest yields and a lower-than-expected planted area by cutting 12.5MMT, or 14.7 per cent out of projected output. This pegged the Russian wheat crop at 72.5MMT, a number even the most pessimistic would have thought unlikely.

All of the production decrease was in the winter wheat crop, with the USDA actually adding 1MMT to spring wheat production, taking it to 22MMT despite the dry start to the crop cycle. Winter wheat production was reduced by 13.5MMT, with the average yield forecast at 3.32 metric tonne per hectare compared to 3.77MT/ha in 2021. The area planted to winter wheat was cut by 900,000 hectares to 15.2 million hectares compared to July estimate.

The plight of the Canadian farmer has been well documented in recent months, with the drought across the Prairies the worst in living memory for most. The production drop was therefore totally expected, with the wheat crop now forecast to be the lowest since the 2010 harvest. The USDA settled on output of 24MMT, 7.5MMT, or 23.8 per cent lower than their July number, but further cuts are anticipated as the early harvest ramps up, and the weather outlook remains dry for the later crops.

Other changes in the wheat production matrix were the United States 1.3MMT, or 2.8 per cent lower at 46.2MMT, Kazakhstan 0.5MMT, or 3.9 per cent lower at 12.5MMT and Turkey 0.5MMT, or 2.9 per cent lower at 16.5MMT. Ukraine saw an upward revision of 3MMT, or 10 per cent, taking its crop estimate to 33MMT, and the Australian crop was also increased by 1.5MMT, or 5.3 per cent, to 30MMT. The Argentinian number was left unchanged at 20.5MMT, but issues are emerging in that part of the world, and India remains on track for a record 108MMT.

In the European Union, it is not so much production, but rather quality that is the primary concern at the moment. Heavy and persistent rains have slowed harvesting in France and other European Union countries, leading to a much lower proportion of the crop meeting the milling wheat criteria. The main issue is test weight, with only 35 per cent of the French harvest-to-date making the 76 kilograms per hectolitre minimum. The Hagberg falling number results are satisfactory for now, but that could easily change if the rain continues to disrupt the harvest.

With lower global production comes the need to ration demand. But that will not be easy, especially with the potential corn supply issues as US production declines. The global wheat consumer has been on a just-in-time diet all year, thinking that worldwide output was increasing and ending stocks were building.

Well, that has all changed in a very short space of time. With global consumption set at 786.7MMT, it will exceed production by almost 10MMT. And despite some minor downward demand revisions, 2021/22 ending stocks are also forecast to decrease by nearly 10MMT.

On the global trade front, the USDA cut wheat exports by 5.7MMT to 198.2MMT, with Russia and Canada bearing the brunt of the decrease, down 5MMT to 35MMT and 5.5MMT to 17.50MMT, respectively. Countering those export falls were Ukraine up 2.5MMT to 23.5MMT, Australia up 1.5MMT to 22MMT and the European Union up 1MMT to take equal top billing with Russia at 35MMT.

How will the global consumer react? Will there be a rush to secure supplies or even build buffer stocks to ensure domestic supply and maintain social stability in some countries? A string of passes on global tenders last week suggests that many still have their head in the sand concerning global wheat production. But once reality strikes, and worldwide demand surfaces en masse, wheat markets could potentially gap even higher.

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

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