Late last week the wheat market took off after Russia announced it would need to import grain. This has cast further doubts on the availability of FSU grain supplies. Ukraine is already applying administrative measures (carefully avoiding contravening WTO trade rules) to ensure they have ready supplies for their Russian friends.
Early in the week prices were further supported by harvest results in Russia that are confirming grain production at the bottom end of official estimates (60mmt vs 100mmt last year).
In western Europe, wet weather is hampering harvest progress and will likely lead to some quality downgrades. For this reason, European traders are avoiding selling wheat against quality specifications. They are keen to sell feed wheat at current prices. Competition from the US is hampering efforts to force buyers to pay more in what is a quiet market.
The results of the Egyptian wheat tender gave us a fair idea of the state of play. It saw good competition with US wheat missing out to French and Canadian supplies, which confirms there is no shortage of willing wheat exporters outside of the FSU.
Corn and soybeans seem to have divorced from wheat for the time being, but will have to push up closer to wheat before nth hemisphere planting later this year.
Whatever way you spin it, this market is still suggesting to sell wheat. While the seasonal situation in WA limits options available to WA growers, production potential is building on the east coast. Hopefully forecast rain lands in WA this week to allow WA producers to restart their marketing programs.
International markets are starting to build a risk premium for problems in the southern hemisphere with both WA and Argentine production looking shaky.
Tuesday, August 31, 2010
Monday, August 16, 2010
Market focus turning to demand
It is a sign that we have seen a dramatic turnaround in global grain supply and demand in the past couple of months; markets are starting to focus on demand.
Over the past few years demand has really taken a backseat to huge supply levels. Growers responded to the higher prices of 2008 and expanded plantings while demand was hurt by the slowdown in the global economy. This led to a global build-up in stocks that pressured prices in 2009 and in the early part of 2010. Supply over the last couple of years has had demand well covered.
Although supply led rallies - like the one we have seen recently in wheat - can be exciting, they tend to be unpredictable and short-lived. Conversely demand led rallies creep up on you but tend to last longer and are stronger.
While wheat has stolen the limelight recently with dramatic price movements, corn prices have plodded along but in so doing are building a strong demand base.
Last week USDA estimated a huge US corn. Despite this, confidence is building for a demand led rally. China has already bought US corn and there are 'hints' of even more aggressive Chinese corn-buying plan with dwindling supplies of feed grains out of the Former Soviet Union (FSU). If China picks up the pace on new-crop US corn purchases, look for the corn market to attempt to slow demand by way of higher prices.
The impact of Chinese demand is already being felt in the soybean pit. US soybean exports to China are currently ‘off-the-charts’ and Chinese demand may not even be satisfied by record crops.
If Chinese demand remains solid it will set up an auction for global plantings between the different grains. Wheat has the early bidding but corn and soybean may yet enter the fray.
Over the past few years demand has really taken a backseat to huge supply levels. Growers responded to the higher prices of 2008 and expanded plantings while demand was hurt by the slowdown in the global economy. This led to a global build-up in stocks that pressured prices in 2009 and in the early part of 2010. Supply over the last couple of years has had demand well covered.
Although supply led rallies - like the one we have seen recently in wheat - can be exciting, they tend to be unpredictable and short-lived. Conversely demand led rallies creep up on you but tend to last longer and are stronger.
While wheat has stolen the limelight recently with dramatic price movements, corn prices have plodded along but in so doing are building a strong demand base.
Last week USDA estimated a huge US corn. Despite this, confidence is building for a demand led rally. China has already bought US corn and there are 'hints' of even more aggressive Chinese corn-buying plan with dwindling supplies of feed grains out of the Former Soviet Union (FSU). If China picks up the pace on new-crop US corn purchases, look for the corn market to attempt to slow demand by way of higher prices.
The impact of Chinese demand is already being felt in the soybean pit. US soybean exports to China are currently ‘off-the-charts’ and Chinese demand may not even be satisfied by record crops.
If Chinese demand remains solid it will set up an auction for global plantings between the different grains. Wheat has the early bidding but corn and soybean may yet enter the fray.
Monday, August 9, 2010
Uncertainty over Russian exports sends wheat market crazy
The market finally got the news it was seeking last Thursday when the Russian Prime Minister announced a ban on Russian wheat exports. The wheat market rallied limit up as buyers around the world sought to cover their positions.
But wheat futures moved limit down on Friday night after the Russian Government clarified its statement about wheat exports. All other grains moved either side of their Thursday close - evidence that the wheat market is acting independently of the other grains and largely on the Russian wheat market story.
The Russian government statements and the way the trade understand them can be all rather confusing. The intention is an export ban from Aug 15th to end Dec but now with the comment that the ban would be again discussed once the government knows final production. This leaves traders uncertain about whether existing contracts need to be met.
Egypt paid a premium over the weekend for French wheat of about US$20/t as a hedge against earlier Russian sales falling through. The French sales are being viewed as bearish, set at a level to prevent US wheat entering the market and indicating there are willing sellers in western Europe.
The market looks set to remain volatile until the Russian production situation is clarified. It seems production estimates are still very dynamic and to the downside. The Ukraine Prime Minister told news wires that its grain production would fall from 49mmt to 42-43mmt, while best estimates for Russia have production and exports down by around 30%.
Attention is also turning to the lack of moisture across Russia and the Ukraine for next planting and dry conditions in WA. Current wheat prices, if they are sustained will see a large shift in wheat plantings for next year, away from corn and soybeans. Rain in Europe and WA would see a big pullback in prices. If it remains dry for another month, there remains upside risk.
But wheat futures moved limit down on Friday night after the Russian Government clarified its statement about wheat exports. All other grains moved either side of their Thursday close - evidence that the wheat market is acting independently of the other grains and largely on the Russian wheat market story.
The Russian government statements and the way the trade understand them can be all rather confusing. The intention is an export ban from Aug 15th to end Dec but now with the comment that the ban would be again discussed once the government knows final production. This leaves traders uncertain about whether existing contracts need to be met.
Egypt paid a premium over the weekend for French wheat of about US$20/t as a hedge against earlier Russian sales falling through. The French sales are being viewed as bearish, set at a level to prevent US wheat entering the market and indicating there are willing sellers in western Europe.
The market looks set to remain volatile until the Russian production situation is clarified. It seems production estimates are still very dynamic and to the downside. The Ukraine Prime Minister told news wires that its grain production would fall from 49mmt to 42-43mmt, while best estimates for Russia have production and exports down by around 30%.
Attention is also turning to the lack of moisture across Russia and the Ukraine for next planting and dry conditions in WA. Current wheat prices, if they are sustained will see a large shift in wheat plantings for next year, away from corn and soybeans. Rain in Europe and WA would see a big pullback in prices. If it remains dry for another month, there remains upside risk.
Monday, August 2, 2010
Market has spoken
International wheat markets rallied strongly last week encouraged by ongoing adverse weather that is destroying crops across eastern Europe. While it is hard to make a case on a fundamental basis that lost production will sustain current price levels, what the market is really worried about is the policy response in Ukraine and Russia.
If reduced European production leads to export bans then the global wheat market takes on an entirely different shape. Over the past two years, Black Sea exporters have dominated the global grain trade.
Already last week the Ukrainian Government has tightened quality restrictions on wheat exports. A key concern for markets is the summer grown corn crop. If this is decimated it will significantly reduce the amount of feed quality wheat available for export. Last year this feed wheat displaced US wheat and corn in Asian feed grain markets.
The lack of rain in WA is another emerging bullish story. Most of the WA wheat-belt has received less than 50% of growing season rainfall and without any soil moisture reserves this crop is now battling against warming conditions and a lack of available moisture. There is no rainfall forecast into mid-August and mean average yields will be hard to achieve without a dramatic turnaround in the season.
Producers in WA with forward sales commitments should be assessing their production potential on a worst-case basis to determine if they should be closing out of sold positions. It is often better to take affirmative action early in the season to limit potential hedging losses.
If reduced European production leads to export bans then the global wheat market takes on an entirely different shape. Over the past two years, Black Sea exporters have dominated the global grain trade.
Already last week the Ukrainian Government has tightened quality restrictions on wheat exports. A key concern for markets is the summer grown corn crop. If this is decimated it will significantly reduce the amount of feed quality wheat available for export. Last year this feed wheat displaced US wheat and corn in Asian feed grain markets.
The lack of rain in WA is another emerging bullish story. Most of the WA wheat-belt has received less than 50% of growing season rainfall and without any soil moisture reserves this crop is now battling against warming conditions and a lack of available moisture. There is no rainfall forecast into mid-August and mean average yields will be hard to achieve without a dramatic turnaround in the season.
Producers in WA with forward sales commitments should be assessing their production potential on a worst-case basis to determine if they should be closing out of sold positions. It is often better to take affirmative action early in the season to limit potential hedging losses.
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