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 1^st 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.

Australian canola unlikely to reach lofty targets

If it weren’t for the extreme wet over the summer, most regions of Australia would be in a ‘mini winter drought’. For the three months from April to June, southern NSW, Victoria, SA and WA all recorded below average rainfall (decile 2 -3), while isolated pockets in these regions were very much below average (decile 1).

If the eastern states receive below average rainfall until harvest it won’t be a complete disaster considering subsoil moisture, but it won’t be a second bumper harvest in a row as earlier predicted. Especially since the BOM have predicted that July through to September is favouring a drier than normal season. The chances of receiving above median rainfall are between 30 and 40% over WA, southern parts of SA and Victoria. While temperatures are tipped to exceed maximum temps for the critical August – September period. East coast regions have got a 70% chance, while WA is 80%!

AOF have revised their estimate for new crop canola by 6% to 2.58mmt, and if this materialises it will be the biggest crop in 15 years. From their June update they have increased area planted to canola in NSW by 5% (395kt) and whilst intended area is unchanged at 800k ha in WA, predicted yields have increased to 1.2t/ha (960kt). Although the rise in yield is justified given things have improved from previous dire conditions, AOF have only decreased their total area in WA this year by 5%. Research that Profarmer has undertaken is that some regions have cut back in the range of 10 - 20%, especially in the upper grade southern.

From the price peak on the 27^th May ($675 FIS), prices have been in a steady decline through June hitting a short term low ($605) on the 1^st July. Prices have since stabilised and have traded in a $20 range since and are now at $620 for Western Australia. While new crop prices along the east coast continued to come under pressure. It has been over a month since east coast canola was $600/t with the contract continuing to trade around the $570 range for July.

Basis (WA cash v Winnipeg Nov ’11 futures) has declined in a similar pattern after reaching a high of A$91 at the end of May, basis has now reached A$45 (the lowest price since 20^th April). With conditions slowly improving will basis decline further dragging prices with it?, just in January -March basis was trading in a range of -$10 and +$10.

Forecast record Australian wheat exports on the back of Russian export ban…..

A bumper domestic wheat crop, expensive US corn and lack of competition from Black Sea countries has got exports forecast at record levels. Even more remarkable this was done on the back of WA having their smallest wheat crop in eight years at 7.6mmt. So far this marketing year (Oct ’10 – April ’11) ABS has forecast total wheat exports at 10.7mmt, with the container trade representing 13% of this. This is in stark contrast with the world’s biggest exporter the USA, which during the same period exported 19.4mmt according to USDA data.

Looking forward to the stem out to September, 18.6mmt is forecast to be shipped and if we calculate an average of 210kt being shipped in containers per month this would mean 19.7mmt being shipped in our marketing year (unless there is slippage). This would be a 26% increase on last year and 40% increase on the five-year average. July appears to be a solid month, taking in slipping from June with a total bulk export program planned of 2.9mmt. Wheat accounts for 2.1mmt.

It is clearly evident that Asian customers are switching to cheaper feed quality wheat at the expensive of US corn. So far this marketing year the Philippines have bought a touch under half a million tonnes of Australian wheat, when last year they brought 100kt. Whilst Vietnam has nearly reached last years record purchases of 1.2mmt, with still 5 months of the marketing year to run.

Internationally the market place tread cautiously after the Russian let open the flood gate for their grain on 1^st July, with many countries excluding Russian origin wheat from their tenders. However this soon diminished with recent tenders being awarded to Russian wheat. Recent orders appear to indicate that low prices are persuading buyers to overcome caution at buying from a country that left them in the lurch with last year's ban.

The USDA has forecast that Moscow is going to export 10.5mmt in their marketing year (July – June), however volumes will depend more on domestic prices and government policy than final size of the estimated 52.5mmt wheat crop. However some private analyst are predicting that the Russki’s may even export up to 15mmt. This is a far cry from the drought ravaged crops of last year when only 4.2mmt was exported before the ban was enforced.

According to ABS, domestic stocks stored by bulk handlers at the end of May was 15.3mmt, a 2mmt decrease from April. Of this 8.3mmt (55%) is milling grade and 6.9mmt (45%) is feed grade. Total stored on farm, BHC and end-users is estimated at 17.2mmt. So taking into account 5.7mmt 09/10 carry in, 27mmt production, 7.2mmt domestic consumption and a forecast record-shipping program of 19.7mmt (Oct ’10 – Sept ’11). Thus 2010/11 old crop carry into harvest could be around 5.9mmt or 22% of last harvest production. This will be the largest old crop carry in for the last couple of years, but still behind previous carry in under the single desk. Thus it is important further bulk export sales take place nation wide over the next quarter to make more of a dent in old crop carry over and place less pressure on a weakening basis leading into harvest.

USDA sends markers sharply lower, so are these prices now the seasonal lows…..?

After much deliberation the Greece parliament passed through their austerity measures. There was now a glimmer of hope there would be a brief period of price stabilisation after three weeks of large fund liquidation. However it wasn’t the macro factors that drove the market lower, it was the USDA which released a bearish acreage and stocks report last Friday that sent the markets into a tailspin. Basically US corn was +100,000 acres above earlier March estimate (at 92.3 million acres), wheat +1.6ma (56.4ma) and soybeans -1.4ma (75.2ma). And the double whammy was quarterly stocks were also above trade expectations at 93.2mmt (corn), 16.8mmt (soybeans) and 23.4mmt (all wheat).

The March-May corn use was much lighter than expected (however still the second highest in history), which showed that demand was finally being squeezed by these record prices. Now there’s more old crop corn for end users to consume and paves the way for 2010/11 corn ending stocks to be higher than anticipated. This therefore puts less pressure on the 2011 corn crop to be perfect. Wheat however was at record usage (+47% compared to last year) after high corn prices drove consumers to offset usual corn consumption.

But like the recent StatCan report, the USDA acreage information was gathered early in June when growers hoping to cash in on high prices, still intended to plant as many acres as possible. Mother nature had other ideas, with persistent rain and cool weather putting an early end to the sowing window. Take for instance Nth Dakota which the USDA only dropped acreage by 2.3ma when earlier last week the states farm agency announced that 6.3ma will go unplanted! Many question marks remain, so they will re-survey growers in the northern plains stats of Montana, Nth/Sth Dakota and Minnesota. These states were originally going to grow 20% of total US corn, and 90% of spring and durum wheat.

It is interesting how the market “buys the rumor and sells the fact”, during the recent US wet weather and so called large amount of acreage that was not going to get planted. These days with modern farming equipment and more horse power the grower only needs a slight opportunistic sowing window and they will grab this chance with both hands; especially when corn was at record prices. However, these crops are not out of the woodwork just yet, vast majority of acreage was put in less then ideal conditions, potentially impacting on emergence and temperatures are forecast to remain cool and wet through to August. This increases the risks of earlier frosts on late maturing plants.

So will we soon see a short term low for all three main commodities, especially since weather premiums are no longer existing in the marketplace? The market thinks so, especially with anticipated aggressive buying emerging. China for instance just purchased 1.14mmt of corn to rebuild their own stocks. Currently both in Australia and US prices have reached their seasonal lows, this is probably a good thing as the market does not want to destroy the demand base. The critical corn pollination period from mid July to mid August, always has the market on edge and if the crop survives this then corn prices will decline and drag wheat and oilseeds with it in the later part of the year.