As we enter another harvest, so far cropping prospects are looking great. After a relatively dry winter, late season rain has pushed many regions to above average yields. However there is increasingly more noise about another wet harvest in WA and along the East Coast. If it weren’t for the crop savings rain in September, Australian East coast grain growers would have been facing a different scenario. Current APW prices are approaching $223 (-$57 compared to this time last year), F1 $190 (-$30) and canola $532 (-$6).
The USDA in its latest world agriculture report shows higher world total grain end stocks and huge wheat ending stocks. Hiking forecast world wheat ending stocks at 202 mmt for the 2011-12 market year (which starts in June), the highest figure for 10 years! Australian cropping prospects due largely to a kind late spring have been bumped up to 26mmt. The estimate of the Kazakhstan crop was boosted by 3mmt to 19mmt, nearly double last year drought ravaged output.
Global wheat stocks-to-use ratio (a measure of the availability of supplies and therefore of price potential), increased from 28.7% in September to 30% similar to a year ago. This means the world has almost four months of consumption in reserve, the data was viewed a negative for prices. While corn is much more of a concern at 14.2%, but rising 6% form September.
While there are regional shortfalls in grain supply (and quality) this year, there is at the moment ample global supplies to meet demand; even Australia is looking at an +8mmt carryover of old crop in this years harvest. The outlook for Northern Hemisphere grain production next spring looks, at least at the moment, positive. In other words, there’s no need for end- users to panic and push prices substantially higher that we saw at the start of the ‘Arab Spring’ this year. This is combined with much larger corn and bean plantings in Sth America, currently enjoying favourable germination.
EU cereals plantings for the 2012 harvest, are forecasting Europe’s farmers will raise grain sowings by 700,000 hectares by bringing non-productive land back under the plough. Total area in 2012 is expected to reach 56.3m hectares (+700k). As what happened in the last great commodity rally of 07/0, growers globally will be sowing those extra paddocks to capture these high prices.
Market fundamentals are turning increasingly bearish (with the possible exception of in the US with dry spell still lingering in southern HRW regions) with Black Sea wheat already looking increasingly likely to dominate proceedings right through until next harvest. Kazakhstan's harvest is finished, blowing the production record completely out of the water with silos said to be overflowing. The will US continue to face stiff competition of the world export stage from the Black Sea, Canada and Australia and this has the chance to further drag down wheat futures.
However one factor that could put a rocket under grain prices, is Chinese demand. The domestic Chinese pork industry continues to soak up increasing amount of grain as prices bounce back to record highs. Despite China's official reports that a record crop is currently being harvested, underlying feed and industrial demand is strong, availabilities appear tight and local prices remain close to all-time high. China, which in theory aims for self-sufficiency in grains, started to import large quantities of US corn last year and its purchases is one of the reasons for prices hitting a record high in June.