Will bullish Sth American estimates hit the bin?

After watching the Argentina and Scottish game in cold wet Wellington on Sunday night, it got me thinking how is the country shaping up for the winter wheat harvest and all important corn and soybean planting. Argentina used to be one of Australia main wheat competitors as both having harvest in the same period, actively selling new crop wheat at the same time. However, total area devoted to wheat has been on the decline, with 4.6 million acres planted this year. This is a 30% decrease over the average sown crop in the 2000’s.

The area devoted to soybeans has risen considerably since 1996, when only 5 million hectares was planted. Area has continued to grow and expand with new land being cultivated in the northern subtropical regions over the last 10 years. The USDA Soybean plantings in 2011 would be 19.3 million hectares. Compared to corn, which 3.6 million hectares is intended to be planted.

La Nina is a known drought producer in Argentina, with continued cooling in the eastern tropical Pacific Ocean it is in its early stages. Hardly any rainfall has occurred in the past 30 days in the main corn provinces. After a relatively dry couple of months, last weeks rain in Argentina was much needed. Up to 50mm fell in the main production states of Buenos Aires and Cordoba. This is perfect timing for wheat and in encouraging rapid corn/bean plantings.

Farmers are inspired to increase corn plantings due to the US production shortfall and higher prices.  Some analysts predict corn area may expand by 20% over last season. The new corn harvest is projected to be 27.5 mmt (USDA estimate). That would allow for 19.5 mmt of exports in 2011-12, up 34% from a year ago. Apparently the USDA takes a very conservative approach to potential big changes in South America, but seemed to embrace “market chatter” in this months report. So while some traders point to increased global corn carryover as a source of price pressure, those tonnes are far from in the bin with plantings just getting started..!


And for the record, the Pumas got over the line by 1 point. But you couldn't tell that by all the bagpipes going off in the pubs after the game.... 

Can the chickpea rally continue...?

After rallying $160 since June, old crop chickpea prices have steady, with prices just  $10 off the high set in late December ($525), while new crop prices continue the rally surging to $570 (NTP Brisbane). Helped by a range of factors, continuing dry Australian conditions in key growing regions, sown area down by 47% compared to last year and strong export demand. Internationally markets have remained firm, largely helped from last week’s severe frost the hit the central Canadian Prairies. Temperatures dropped down to -8˚C throughout most of Saskatchewan. Frosts again hit the following day, but wasn’t as severe. It had been estimated that only 28% of chickpeas were harvested before the frost hit, while key growing regions had not even yet started. The rapid harvest of peas and lentils has allowed these crops to escape any significant damage.

Since a large part of Canada's exportable surplus will likely be frost damaged, it will be excluded from some markets. That adds bullish pressure to the world's medium to high quality market niches. While Canada's crop usually doesn't hold much sway in directing the global chickpea trade, global tight supplies and lower acreage have end users hoping for a decent sized crop out of North America to tide them over until the Australian and Indian crops come off.

India the world's biggest buyer of pulses will likely import less despite a slight fall in its summer-sown crop, as there are sufficient supplies from last season's bumper harvest. Pulses output has overcome almost a decade of stagnation to hit a record 17.3 mmt in the June 2010-11 market year. Imports are thus forecast to decline by 500kt to 2.5mmt. India Pulse and Grain Association have estimated that output of pulses during this summer season will likely be a little higher than the government's estimate of 6.4 mmt, due to favourable monsoonal rains. However acreage has slipped as growers have opted to grow more cotton and sugarcane as prices have surged in 2011.

Strategically I would not be a seller of new season chickpeas until they are in the bin, and probably concentrating in the Jan-March window, while exports from Canada are slow in the depth of their winter and before the Indian harvest. However, if this situation in Canada creates shorts in the market near term where Canadian exporters needing product get coverage from Australia, we could see a spike in prices any time for a short period, a bit like lentils last year when the harvest rains struck Canada.  Selling a few tonnes into a short driven spike might be an opportunity that now opens up.

Canola price continues downward trend.

Both international and domestic oilseed markets remain in a downward bias, on the back of US beans coming of contract highs and rapidly advancing Canadian harvest. After strong price hikes in August, values have been pressured this month, US beans -101c, Winnipeg canola -$28/t, whilst east coast track -$11/t and WA FIS -$18/t. However with the bulk of the Australian crop going to Europe this year, EU Rapeseed values have held steady and have only declined €3/t.

With the oilseed complex retreating from previous contract highs, and now US soybean harvest pressure commencing, what outside markets can prop up prices? Even a frost last week in the northern US Midwest couldn’t feed the bulls appetite, as funds continue to unwind positions. However the frost could be a sleeper issue, as the chance of pod shattering would have higher than usual with the late start to sowing and subsequent slow maturity. USDA last week estimated that only 8% of Iowa crop was mature compared to 24% normally.

There are still thoughts that yields will be further reduced from the USDA Sept estimate of 41.8 bpa. This is still below trend line yield and seems optimistic considering the dry August weather. Historically, the September forecast has not proven to be a good barometer of the final production. With corn prices maintaining a premium over soybeans throughout most of 2011, beans need higher prices to attract additional acreage next year to avoid a year on year decline in stocks.

Earlier, there were some bullish concerns raised about the lateness of the Canadian canola crop and the potential threat from frosts/heavy rain, however these threats have now subsided. Unusually warm weather (apart from last weeks frost) and clear skies have dominated the prairies over the last three to four weeks, allowing an uninterrupted harvest. With  53% of the canola crop is in the bin, compared to the three-year average of 19%. Adding pressure to prices is reports that yields are better then expected and growers making up for last year’s poor financial returns eagerly selling the bumper crop in the cash market.

Australian Oilseed federation has revised canola production down by 30kt to 2.46 mmt in its latest September report. This is still forecast a record crop and 12% higher then last years bumber crop. Although with conditions warming up and a very dry couple of months throughout SA, VIC and southern NSW the crop could be revised lower. WA crop is forecast at 960kt, with higher production from Geraldton forecast to make up the sharp declines forecast in the Esperance zone. 


With new crop canola continuing to erode our marketing advice remains the same, to stand aside for the next few months as North American harvest pressure increases. What normally happens is that prices will stabilise and then begin a slow recovery after harvest. That would normally allow Australian growers to make harvest sales at prices above those we see during the September to October period.

Signs of La Niña emerging, so another wet harvest?

It seem that Eastern Australia will see another wet harvest whilst WA will swelter through another dry summer, according to the NOAA. In its latest forecast the US National Oceanic and Atmospheric Administration states that La Niña has re-emerged in the Pacific Ocean and is forecast to gradually strengthen and continue into our summer. Current conditions reflect a re-development of the June 2010-May 2011 La Niña episode. While the Australian Bureau of Meteorology (BOM), which measures La Nina slightly differently, reports conditions are trending that way and a return to full-scale La Nina conditions before the end of the year cannot be ruled out.

Whilst the east coast of Australia copped heavy rain in December, the strong 2010-11 Niña contributed to record winter snowfall across the Canadian prairies and northern US states. The subsequent thaw resulted in large scale spring flooding. While in the southern states dry conditions during sowing this time last year continued into 2011 resulting in wheat production being halved in Texas, Oklahoma and southern Kansas. The resulting drought and extreme temperatures made it one of the worst on record.

If La Nina does emerge by the end of the year and current conditions continue dry in the US, the odds are drought conditions will be deepen further during the ensuing four to five months. This will severely impact winter wheat sowing and emergence for the second year in a row. If La Nina lasts too long next year there will be potential for dryness throughout the southern United States to lift northward during the growing season impacting a larger part of nation, but more importantly early season corn and beans crops may be threatened with drought early in the 2012 growing season.

Back home, when La Nina brings heavy rains across Eastern Australia is does bring extreme volatility in prices. Take for instance last harvest, when up to 150mm fell across most regions in the first week of December. APW1 prices after averaging $265 through most of November, surged $67 in a couple of days. The H1 spread ballooned out to $117, after being $50 the week before and FED1 discount was out to $123.

With high protein wheat and durum balance sheets at tight levels both domestically and internationally the trade doesn’t want another year like last. With new season multi-grade wheat spreads currently at historical average levels, make sure when you take out a MG contract if the spreads are floating or locked in.

Infrastructure stalls Russian exports, while Ukraine remains the sleeper

Declining funding and reluctance in replacing Soviet era rolling stock and infrastructure has threatened to derail burgeoning Russian wheat exports. In a similar scenario to Australia’s last harvest where supply lines didn't cope with strong demand and reduced rolling stock exacerbate the issue. The Russian national rail company is stating that it has banned rail movement to the main port of Novorossiysk, after a backlog of more than 3,500 railway cars clogged lines in the north.

There are reports surfacing in Novorossiysk, which has a capacity of around 1.4mmt a month, exporters have placed orders to deliver 500-600 railway cars a day, which is double the amount the port could handle. Even if the railway delivers all the contracted grain, the ports will be working at the limit of their capacity, with a large carryover for October expected.

Exports are forecast to surge as buyers shun traditional and more expensive exporting countries and scramble for the world's cheapest grain. After last years drought ravaged crop of 61mmt, this year is forecast to hit 61mmt, with these ample supplies dominating global wheat sales of late (especially the price sensitive buyers). After the first two months of the marketing year Russia has exported 5.8mmt of grain (2.6mmt July and 3.2mmt August). With the Russian Grain Union forecasting that total exports could hit 25mmt, up steadily from the previous records of 18.5mmt set in 2008 and 2009.

Given the unreliability of the country as a reliable exporter and in lieu of the recent grain ban, the current logistical nightmare will cause domestic basis to move higher and make customers source grain from other ports or even other countries. Since Black Sea grain has been the key bearish factor weighing on international markets, any rise in Russian prices could have a sharp knock-on effect on world grain prices.

Russian origin FOB prices are slowly creeping up in value, looking at previous GASC (Egypt state grain buyer) tender results. Values have increased by $30/t over the last month, exceeding the $18/t move in CBOT DEC futures over the same time.

In contrast Ukraine ports are resemble a ghost town, as government red tape is stifling exports. Although Ukraine has forecast a bumper crop of 51mmt of which 21mmt is wheat, little is being exported due to red tape and export levies making prices as much as $30/t over neighbouring Russian origin. The export duties on wheat is at 9%, whilst barley is slugged 14%.

Originally Ukraine forecast  exports between 20 -25mmt, but so far in July and August, wheat and barley export have slumped to 1.8mmt (-22% then in 2010), with the bulk of wheat exports feed due to rain downgrading as much as 60% of the wheat crop. Up to 1mmt of barley has been exported mainly to the Sauid market. The levies are expected to stay until at least Christmas. So when these levies eventually go up in smoke, expect Ukraine wheat to be aggressively priced into world markets at a time when Australian new crop hits the world market.