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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.

Harvest action heats up in Europe …

Harvest action heats up in Europe …

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Many European regions recorded record high temperatures last week as the continent sweltered through its second heatwave of the summer. However, reaction of the grain markets has been tempered by expectations that this heatwave will be short-lived and is not expected to last long enough to cause severe losses in winter crop production.

Field conditions through most of Europe are generally quite good, and the trade is not expecting a repeat of last year’s terrible harvest. Those crops that were still at grain fill stage may lose between 0.25 and 0.50 metric tonne per hectare (MT/ha), but the heat will probably lead to a boost in protein levels according to local analysts.

Government agency FranceAgriMer said that 63 per cent of French wheat had been harvested by July 22, compared to 33 per cent only one week earlier, and 88 per cent at the same time last year. The dry conditions are ideal for reaping, and the French wheat harvest is expected to be almost completed by month-end with production in the 38 to 39 million metric tonne (MMT) range.

Harvest in Germany, the second-biggest wheat producer in the European Union (EU), is also progressing well. Reports suggest that it is now more than half completed with yields equal to, or even a little better than expectations.

The condition of the French corn crop had fallen to a rating of 67 per cent good to excellent before the record heat struck last week. This compares to 75 per cent a week earlier. The corn crop is at a critical growth stage and yields will fall dramatically if beneficial rains don’t arrive very soon. The latest heatwave will no doubt take a further toll on the health of the crop and this is expected to be reflected when crop rating numbers are updated this week.

There is talk in the trade of corn fields in northern France being cut for silage due to the heat; a trend that will be monitored closely in coming weeks. The trade is now estimating the country’s corn production at around 11MMT, versus 13MMT last year. Some rain over the weekend bought relief in some areas to pollinating corn crops.

Meanwhile, the International Grain Council (IGC) released its latest grain market report last Thursday. It was highlighted by a 6MMT decrease in global wheat production to 763MMT. While still a record, the decline is a reflection of smaller crops in the European Union, Russia and Canada compared to their June report.

The IGC pegged EU wheat production at 148.7MMT. This compares to their June estimate of 151.2MMT and 128.8MMT last season. There were downward revisions for France, Germany, Britain and Poland, primarily due to the June heatwave, which occurred when the crop was more susceptible to damage, as opposed to last week’s high temperature hit.

The Russian wheat crop was trimmed by 5 per cent from 79.5MMT to 75.7MMT. This is still higher than SovEcon’s latest forecast, which was pared by another 2.9MMT last week to 73.7MMT. The Russian agency also slashed its wheat export forecast for the 2019/20 marketing year by 6.2MMT to 31.4MMT. This is well below the 2018/19 export volume of 36MMT.

Moscow agency Rosselkhoznadzor (Federal Service for Veterinary and Phytosanitary Surveillance) said the Russian wheat harvest was 36 per cent completed as of late last week, with average yields coming in at around 3.7MT/ha, versus 3.83MT/ha last year. However, yields have been trending downward as harvest has progressed, a result of extremely dry conditions throughout June.

The IGC also cut the Canadian wheat crop by 5 per cent, from 33.6MMT to 32MMT. The crops in many regions showed stress after a dry spell through June and early July. Rainfall in late July has improved the soil moisture situation but conditions are reported to be quite variable from region to region.

Ukraine is reported to have completed 76 per cent of this year’s wheat and barley harvest. As of last Thursday, 19.7MMT of wheat and 6.7MMT of barley were in the bin. Wheat yields are reported to be improving as the harvest progresses with the average now sitting at around 3.85MT/ha, compared to 3.59MT/ha just a week earlier.

Some traders are reportedly increasing their Ukrainian wheat production estimates to 28MMT, or even higher, given the improving yield trend. This compares to the Agriculture Ministry’s estimate of 26.9MMT. The quality of Ukrainian wheat is excellent with about two-thirds milling quality and one third feed quality. This has caught the trade by surprise, leaving feed wheat shorts scrambling.

In further trade news, China’s General Administration of Customs (GAC) has reportedly granted permits for wheat imports from Russia, specifically from the country’s Kurgan region. This will compete with Australian origin wheat into China, particularly the northern ports. GAC has also approved soybean imports from all parts of Russia.

Closer to home, a group of private importers from the Philippines purchased 275,000 metric tonne of Australian feed wheat from CBH for October to December shipment at an average price of AU$240.60 Cost & Freight (C&F).

That is quite interesting when compared to Black Sea values. European harvest pressure sees Black Sea wheat prices challenging season lows with sluggish global demand and a lack of forward sales holding values at bay.

Last week Black Sea feed wheat was quoted at around US$187 Free on Board (FOB) for September. Add sea freight of US$33, and the 7 per cent import duty, the Black Sea origin price comes to US$235 C&F, more than US$5 under where the business was booked.

Does that represent a quality premium for Australian origin? Unlikely for feed wheat. Are replacement Black Sea values higher than are being reported? Maybe. Or is there a reluctance to book Black Sea origin over Australian at similar price levels? Hopefully so, as that will augur well for Australia’s marketing program into Asia moving forward.

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