Trying to forget the politics for a moment…   | Grain Brokers Australia

Posted by | January 22, 2019 | Misc, Weekly Commentary | No Comments

Trying to forget the politics for a moment…

A lack of adequate snow cover to protect the winter crop against cold weather is raising some concerns in parts of the northern hemisphere. The snow cover acts as an insulation layer for the hibernating wheat and barley crops. If this is not present the exposed crop becomes susceptible to damage, and even death, from freezing winter temperatures.

The areas of adequate snow cover are confined to eastern Europe and the Balkans. This leaves the crop in the central and western regions susceptible to the sub-zero temperatures that are forecast for most of Europe over the next few weeks. Rainfall will alleviate the immediate issue in isolated regions, but an exposed crop remains very susceptible to a cold snap.

No such issues exist in Russia or their Former Soviet Union (FSU) neighbours where the snow cover is reported to be excellent and the winter crop in good shape. The snow cover is so thick it has actually been playing havoc with the movement of wheat and barley to the Black Sea ports for export in recent weeks.

Across the Atlantic, it has been bitterly cold in the northern parts of the US. The market has been finding support on worries that recent snowfalls and the forecast snowstorms may not be extensive enough to protect the winter crop adequately. Freezing temperatures are forecast for much of the Plains and Midwest through to the end of January. The snowstorms are expected to be less severe in the Southern Plains, but so too are the temperatures, reducing the potential weather and production risk in those counties.

US wheat futures closed out last week in positive territory on the back of firmer Black Sea export values. There appears to be a renewed feeling that the market and price will ensure Russian domestic requirements are met by restricting exports enough to negate the need for government intervention. Available shipping data suggests that there has been a sharp drop in Black Sea wheat loadings to open the New Year despite their dominance of recent Egyptian tenders.

Rumours also abound of fresh US export wheat business being concluded along with reports of optional origin sales being switched to US execution. US hard red winter wheat is now around US$3-5 cheaper than both Russian and EU origin wheat. However, all of this remains anecdotal as long as the government shut down continues and the key United States Department of Agriculture (USDA) market data is not being collated.

The window for the US and EU to gain wheat export traction before new crop grain is available gets smaller with every unsuccessful Egyptian tender, not that they are the only option. The market is also expecting vastly improved supplies in 2019/20 as global cereal production rebounds from drought reduced production in many jurisdictions this season.

European Union wheat production, for example, is forecast to be 147 million metric tonnes (MMT), an increase of 16% on this season’s production of 127 MMT. With a return to more normal seasonal conditions, both Australian and Russian production could easily be up at least 6MMT. That will bring production in the major exporting countries back to around 400MMT, up from 364MMT this season.

Weakness in corn futures values in the middle of last week bought out some buyers with South Korean importers booking around 260,000 metric tonnes (MT) in snap tenders. The biggest purchase of 135,000MT was made by the country’s largest stockfeed manufacturer, Nonghyup Feed Inc (NOFI).

The export interest, and the ongoing weather concerns in South America, pushed corn futures higher into last week’s close. US corn exported from the Gulf of Mexico is now cheaper than Ukraine origin corn delivered into many Mediterranean destinations. Pacific North West (PNW) export prices are also competitive trading on a par with Argentinian values into the Korean Peninsula.

Total precipitation in the Brazilian state of Mato Grosso this summer crop season is running around 35 per cent below last year. The state produces almost 40 per cent of Brazil’s safrinha corn crop. The first corn crop only makes up about a third of Brazil’s total corn production with the second crop (safrinha) making up the balance. This crop is planted immediately after the soybean crop is harvested and is the major contributor to their export program. With the soybean harvest ramping up in Brazil at the moment the safrinha plantings have also just commenced, with harvest expected in May.

Market talk suggests China is bidding for Ukraine corn at evens to PNW export values. Given the freight spread is around US$18 in favour of the US, significant sales to China are indeed possible if a resolution can be found to the ongoing China-US trade war.

Speaking of China, African swine fever is still a significant concern with 916,000 pigs culled after around 100 outbreaks of the disease had been recorded in 24 provinces since August last year. While that seems a high number, it is small relative to the total pig population of around 430 million head. China slaughtered almost 700 million pigs in 2017.

With US corn prices now competitive internationally, downside from current price levels appears limited. US corn is currently the cheapest in the world and will most likely remain so until the new crop South American harvest comes on stream in the second quarter of the year. Here again, the shutdown means we have no idea if the US is gaining traction in global markets.

The political issues of recent weeks have been a massive distraction in global grain markets. The dearth of crucial information and statistics has created a market that is merely treading water, with no direction and no rudder. As a result, the trade focus has now turned to the weather extremes being experienced across the world and the possible global supply ramifications. But that is only one side of the critical supply and demand equation.

Peter McMeekin is a consultant to Grain Brokers Australia. Call 1300 946 544 to discuss your grain marketing needs.

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