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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.

Who holds the Trump card in the ongoing trade war?

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World agricultural commodity markets look set for continued volatility as the trade truce between the United States (US), and China appears to be dead in the water. Late last week both Washington and Beijing released statements suggesting that a deal to end the bitter trade dispute was unlikely in the short term.

Negotiations have been at an impasse since May with both sides claiming the other reneged on provisions of a tentative deal. Tensions escalated last Thursday when The Don (Trump) announced, via Twitter, a new tariff of 10 per cent on US$300 billion worth of Chinese imports that aren’t already subject to US duties.
This is on top of the US$250 billion worth of Chinese imports that are already subject to a 25 per cent tariff imposed mid-way through last year. The new tariff is set to come into effect on September 1.

It was no surprise to see China respond to the latest announcement by saying that they would take all counter-measures necessary as a result of the escalation in the trade conflict. However, the trade imbalance is a huge challenge for China. Washington has the potential to tax around US$540 billion worth of Chinese imports, but Beijing only has around US$120 billion worth of US goods it could target.

That said, President Xi Jinping does hold one significant trump card. China controls more than 90 per cent of the world’s production of rare earths, a group of 17 metals with magnetic and conductive properties that power most of the globe’s electronic devices. More importantly, it also accounted for 80 per cent of all US rare earth mineral imports between 2014 and 2017.

Chinese imports of US agricultural commodities have fallen dramatically as a result of Don’s Party (the trade war). Beijing retaliated to the initial round of US duties by slapping a 25 per cent tariff on a long list of US goods, including soybeans, in July 2018.

China is by far and away the world’s biggest importer of soybeans. The burgeoning demand for soybeans in China over the last ten years has been driven by an explosion in demand for meat as consumers shift from a diet dominated by rice to one where pork, poultry and beef play an increasingly important part.

In 2017, Brazil and the US were the two biggest soybean exporters, totalling US$25.7 billion and US$21.4 billion respectively. China accounted for two-thirds of global trade, importing US$39.6 billion worth of beans. In the same year, US exports were around a third of Chinese soybean purchases. At just under US$14 billion, soybeans were the second most valuable US export to China, behind aeroplanes.

However, the US share of that import demand has changed dramatically as a result of Don’s Party. Up to the end of May this year, US soybean exports to China were less than 6 million metric tonne (MMT), with a value of around US$2.7 billion. In volume terms that is almost an 80 per cent decrease compared to the three-year average of 29MMT for the same period.

It is no accident that the Chinese chose to impose tariffs on soybeans. The biggest producing soybean states are across the US Midwest, and this is The Don’s heartland. The farmers voted him into office. Beijing hopes that the farmer will either lobby Washington to solve the impasse or desert Trump at the ballot box in next year’s election.

So, what does The Don do to appease the US farmer? He announces another support package worth a monstrous US$16 billion, that’s what! According to a United States Department of Agriculture (USDA) announcement late last month, the latest Market Facilitation Program (MFP) payment “is aimed at supporting American agricultural producers while the Administration continues to work on free, fair, and reciprocal trade deals” with China.

This is the second round of trade assistance announced by the US in response to what Washington termed as “unjustified retaliatory tariffs” on agricultural commodities. The first program, totalling US$12 billion, was announced in August 2018, with payments made in the third quarter of 2018 and the first quarter of 2019.

Primary producers can qualify for payments ranging from $15 to $150 per acre for row crops under this year’s version of the MFP, with rates varying widely by county and region. The rates are based on the historical mix of crops produced by each county as well as USDA’s calculation of the impact on each commodity of unfair trade practices over the past ten years.

The first tranche of payments is expected to begin this month with a potential second wave in November and a third, and final, distribution in January 2020. The USDA said that the second and third payments could be cancelled if the trade war with China is resolved beforehand.

The irony is that recent research has found that 10 per cent of the recipients, predominantly large corporate farms, are receiving a whopping 54 per cent of the payments. The vast majority of US farmers, the smaller operators, those with the least ability to cope, but are copping the brunt of Don’s Party, have been abandoned as the payments are proportionate to farm size and success.

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

US-China trade war is now a love fest…

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World grain markets trod water early last week ahead of Thursday’s release of the October World Agricultural Supply and Demand Estimates (WASDE). Ramifications of same were quickly forgotten after the announcement on Friday (Saturday morning Aussie time) of an interim trade pact between China and the United States (US).

US futures were a sea of red on Thursday following the release of the WASDE report, with CBOT wheat, corn and soybeans closing down 9 cents per bushel (c/bu), 14¼ c/bu and 1¼ c/bu respectively. That all turned around on Friday after news of the trade deal broke with wheat up 16 ½ c/bu, corn gaining 18 c/bu and soybeans up 10¾ c/bu.

The Friday action was predominantly fund buying as they scrambled to cover their shorts. They are reported to have purchased 40,000 contracts of corn, 15,000 contracts soybeans and 10,000 contracts of wheat. This equates to 5MMT, 2MMT and 1.4MMT of corn, soybeans and wheat respectively. Not bad for a day’s work!

Political pressure had been mounting for both leaders to reach a compromise after economic headwinds had struck both economies in recent months. It also came at a time when both leaders were trying to deflect attention away from domestic issues; impeachment for Trump and unrest in Hong Kong for Xi Jinping.

Trump had been holding out for a comprehensive deal that addressed a range of concerns around Beijing’s management of its economy. The Chinese negotiators were equally resilient, responding to US threats of increased tariffs with new measures of their own and refusing to include many of the US concerns in negotiations.

In the end, it seems that they have settled on an interim agreement that involves China buying more US agricultural products and undertaking several minor measures to open up its economy in exchange for the United States waiving the planned tariff increase set to take effect this week.

According to President Trump, the agreement was going to be great for both countries and was “a great deal for world peace. You know there was a lot of friction between the United States and China, and now it’s a love fest.”

He said that Beijing had agreed to buy $40-50 billion worth of US agricultural products which was a massive win for the US farmer. With the summer crop harvest ramping up in the US at the moment it will certainly be welcome news across the US corn belt, a key area for Trump in his run for re-election in 2020.

With the details of the pact yet to be inked, the biggest concern, for now, is how long the renewed affections will last and whether the deal will ever be consummated.

Meanwhile, there were a few surprises in the United States Department of Agriculture (USDA) October WASDE numbers compared to the previous month. The corn yield was raised slightly from 168.2 bushels per acre (bu/ac) to 168.4 bu/ac. It may have been quite a minor increase, but the trade was expecting a decrease of as much as 3 bu/ac. The USDA did cut the expected harvested area by 200,000 acres leading to a fall in US production of 0.5MMT.

Global production was decreased by 1 million metric tonne to 1.104MMT with non-China production decreasing by the same amount to 850MMT. Ending stocks were up in Brazil and Mexico and down in the US and Ukraine. The net effect was a fall of almost 4MMT in global and non-China ending stocks to 303MMT and 107MMT, respectively.

On the soybean front, the USDA reduced the expected harvested area by 300,000 acres to 76.5 million acres and cut the forecast yield from 47.9 bu/ac to 46.9 bu/ac. This led to a decrease in US production of 2.25MMT compared to the September estimate. Production in all other major production jurisdictions remained the same month-on-month resulting in a global number of 339MMT.

Soybean ending stocks were reduced in the US by almost 5MMT. This was partially offset by increases in both Argentina and Brazil culminating in a net fall of 4MMT to just over 95MMT globally.

World wheat production was virtually unchanged at 765MMT, but the numbers for several of the major producers are questionable. The USDA reduced the Australian crop by 1MMT but still have us pencilled in for 18MMT. The crop in Australia is suffering big time at the moment, and anything above 16MMT would be a miracle.

Argentinian wheat production was left unchanged at 20.5MMT. However, the season has taken a turn for the worst in many areas with drought conditions expected to have a significant impact on final yields. The provinces of Cordoba, La Pampa and the west and south of Buenos Aires province are in serious need of rain to arrest the decline.

The Buenos Aires Grain Exchange have reduced their production estimate from 21MMT to 19.8MMT and called the wheat crop 23 per cent good /excellent, against 30 per cent last week and 37 per cent last year. The Rosario Grain Exchange have also cut their estimate by 1.5MMT to 20MMT. However, private forecasters are saying wheat production could already be less than 19MMT.

The biggest swinger in the world wheat space could be Russia. The USDA left production unchanged at 72.5MMT, but Russia’s Agriculture Ministry put production at 75.6MMT with 1-1.5 million hectares still to harvest. That means that the early season forecasts of a 78MMT Russian wheat crop is highly possible.

This all means that the world wheat balance sheet is burdensome. Production is 30MMt higher than last year, projected global demand has fallen by 8MMT since the June WASDE report, forecast exports have dropped 6MMT over the same period, and world ending stocks are now expected to be 4MMT higher year-on-year. Competition from the major exporters is increasing, but world stocks continue to grow.

Wheat is lacking a significant demand driver at the moment, and the overall landscape is only likely to change if there is a significant weather event to disrupt supply or a political event that interrupts traditional trade flows.

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

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