Black Sea dominates wheat trade, while Australia lags.

After much huffing and puffing the export duty for Ukraine wheat exports is finally destined for the scrapheap. And now Egypt the world’s largest wheat buyer has placed them on the approved wheat destination list. Ukraine will now be making as much hay as the sun shines, or getting as much wheat shipped before the government tries to implement another tax to bolster their pockets! They will find that much of the nearby demand is covered, so would potentially be in the market for grain into the New Year, smack back in the middle of Australia’s traditional busiest export period.

They could also have most of the trade during this period, if Russian ports don’t freeze or logistics bottlenecks appear in Russia or Kazakhstan. Recently the Kazakh ministry confirmed bumper crop at 22mmt, more then double from last year. Nevertheless, logistics will be key on determining how much of this crop actually reaches the export market.

"Russia will approximately export 24-25mmt grain, and after that we will introduce certain limits in order not to leave the country with no bread and for us to accumulate reserves that will make up next year's reserves," Putin warned recently. This should not cause any nearby problems, especially with Ukraine and nearby Kazakhstan chomping at the bit to have a slice of the action in 2012.

Ukraine aggressive selling can also keep a cap on the Russian prices increasing too much. The government does not want higher domestic prices, ruffling feathers internally and secondly, Russia doesn’t want to again tarnish their reputation as a reliable supplier of grain. It regained its positions with its main buyers quickly this year, though at a cost to its farmers, by undercutting competitors at key tenders. Some may say this was a throwback to the days of the Tsars….!

Australia, Canadian or United States origin wheat hasn’t had any volume being shipped to Egypt on GASC tenders since the end of June. Since then and when Russia re-opened ports for wheat exports, it has been all Black Sea origin.  Since the start of June, 3.6mmt has been exported, of this 80% was Russian 5% Romanian, 7% Kazakh, 9% Ukraine.

This surge in Black Sea origin wheat, is hurting international values. Not only is EU volume down but US and Australian exports also. Especially shipments from the US, have declined 24% to 26.5 mmt this season, the biggest drop in a quarter century..! Before the Russian export ban, average Australian exports from July – Sept were sharply lower then the Oct ‘10 – June ’11 period. A trend that was reversed compared to the previous four years.

Markets face more downward pressure as world stocks swell....!

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.

Strong rationing sends markets sharply lower.

After a couple of weeks of strong macro related market pressure, the commodities market was again heavily sold off. Albeit, this time was on a strong fundamental aspect. The USDA released data indicating that old crop stocks were higher then what the trade had anticipated. Corn was the most bearish, leading the charge and finishing a 40c/bu limit down for the first time in 2011. Old crop stocks were as much as 4mmt above trade estimates at 28.6mmt. However food for thought was last years Sept stocks report offered a similar shock. But initially large inventories turned out to be a knock-on effect of an early corn harvest and values soon started their long twelve-month rally.

Corn stocks have been falling to near historic lows for most of the year, helping to push prices to all time record high levels over the last couple of months. Although previous strong demand has contributed to driving corn prices higher, it seems that higher corn prices has finally sharply rationed demand. With more then a third of all US corn going to ethanol production, it looks like demand can be quickly rationed compared to livestock consumption.  However the flip side is that demand can quickly kickback into gear when price allows. Although stocks are still tight, with supplies at their lowest level since 2003 and inventories currently 34% below a year ago they are not tight as they once were..!

Wheat production numbers were considered mildly supportive, but were offset by bearish news for old crop wheat stocks and strong price pressure form corn. Stocks came in higher then expected, indicating that domestic feeding wasn’t as high as expected and slow export demand. However spring wheat production came in even lower than expected (12.5mmt), prompting only slight declines on MGEX trading, with the current premium over CBOT now at 200c/bu. Durum stocks came in at 1.4mmt, below trade estimates and as much as 50% below last years level. Total wheat stocks was 54.6mmt, 9% less then last year.

The report was considered slightly supportive for the soybean market with Sept stocks pegged at 5.8mmt, which was 272kt below trade expectations. However, talk of better than expected yields in the Midwest plus dry weather in the forecast into early next week has traders talking about increased harvest selling pressures ahead.

Southern states of Victoria and South Australia have bared the brunt of todays price reaction, with new season APW prices coming off $17/t. Northern port zones have feared better coming off $9 - $13, while over in the West prices have decreased $12, with basis improving. However it was a holiday in NSW and SA today (Viterra, Elders and Graincorp), so we will see tomorrow how the entire trade responds.   

With the widespread rains in September, we may start to see domestic prices distancing itself more from international futures. However with the dollar declining to its lowest level against the greenback since last December, basis has held steady over the last week.

So where from here..... The short term view is the recent price correction is we needed to see after all commodities rallied strongly over the last six months. General consensus is maybe we have seen the lows priced in, and now the trade is waiting for the market to consolidate around these levels and build up again from here. If climatic conditions allow for average yields globally next year, then there should be plenty of grain around. If we get any hiccups (and probably Sth America is the most vulnerable for the market over this period being La Nina still lingering), then the market will pretty quickly build back in some risk premium about supply concerns.