Tuesday, July 26, 2011

Russian wheat dominate market sales, but will it last..?

Of late, a lot of chatter has been said about how much grain Russia will export into the world market after the ban was lifted on 1st July. Since then the country is expected to export 1.5mmt of wheat this month, with a further 6.5mmt of requests already been lodged with customs. The Russian Ag minister said that up to 18mmt could now be exported in the 2011/12 marketing year this is the same amount of wheat they exported in 2009/10 (2.8mmt of barley). This is in sharp contrast to the USDA figure of 12 mmt.

Recently the Russian government has forecast a grain crop of 90mmt, +5mm on the previous forecast. This bullish estimate is given even though drought has intensified this month in the lower Volga river basin. Drought expanded and impacted portions of the southern Ural Mountain region, the middle Volga River Basin and eastern Ukraine. Extreme heat has affected the Russia spring grain belt and eastern Ukraine in recent days; temperatures have been between 35- 40C for the critical grain-filling period. Even more alarming the infamous hot wind that sweeps in from the steeps “sukhovei” has been dominating the region of late. The area of dryness will expand significantly and late season crops may be most negatively impacted.

Also what also needs to be taken into account is last years winter wheat sowings was cut by 15% on the back of lingering effects of last years record drought, with growers opting to fallow paddocks until this years spring plant. Usually spring wheat yield up to 20% less than winter wheat.

Russia seems likely to have plenty of cheap wheat to sell, and isn't wasting any time on serenading the world with cheap grain. Currently Aussie SFW wheat has been quoted around $10 below Black Sea origin feed wheat at $240 FOB. While the spread between US feed wheat ($270 FOB) and French ($289 FOB) are much higher.

On these low numbers wheat is struggling to find support on its own merrit, and of late has been riding on corns coat tails. News that the Russkies have again sold 120kt wheat to Egypt (500kt in three weeks) has further weighed on international wheat values. Thailand has also brought some Russian wheat recently, wrangling in on Aussie market share. Thailand ususally buys 450kt of Aussie wheat a year, and from October to May this year have already purchased 451k.

Regardless of weather problems in the US or quality issues in the EU, increases in export volume of this sort of magnitude potentially may put a cap on price appreciation during the next six months. However price volatility will be a continuous theme until this years US corn crop is in the bin, until this happens corn futures will be dictating where feed grains will head for the second half of the year.

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