The road to 2012 prices

Last week the USDA had their annual outlook conference, sharing thoughts on the marking year ahead (June – May). Grain futures largely shrugged off bearish crop acreage estimates focusing more on short-term bullish fundamentals on increased export demand and general weather uncertainty. All wheat acreage was pegged at 58ma, this was 1.5ma higher then the market expected and +6.6% compared to last year. Spring wheat acreage is set to ounce back after back-to-back wet springs. MGEX declined 35.75c last week; compared to neighboring CBOT that was only down 3c.

US corn acreage was pegged at 94ma (as expected), +2.3% from last year and the biggest planted area since 1944. 12/13 ending stocks forecast at 41mmt vs 20mmt this year and stocks/usage jumps to 12% from 6.3% this season.  Anticipated large acreage continues to limit strong advances.  Assuming baseline yield of 164bpa, production could hit a record high of 354mmt (assuming 8% abandonment). However yields over the last two years has been sharply lower then baseline. And combined with a lot more corn being planted in non-traditional regions, this may drag on overall final yield. Also another factor that needs to be raised is the GM seed debate, and if yield upside has been reached? Nonetheless current numbers are bearish, but at the end of the day are still just numbers. Mother Nature as always will have the final say.

Although old crop corn supply is tight, weakening ethanol margins and a firming basis may help to conserve corn before new crop comes off in September. Corn demand from the ethanol sector is seen falling in 2012/13 which would lead to a very sharp rebound in ending stocks in an average growing season.  However with crude oil knocking on the door at $110 barrel, may be some source of comfort. This may lead to improving margins for the ethanol market, at a time when it needs it most, with the blenders' tax credit now up in smoke.


New season US soybean acreage was pegged at 75ma, which is similar to last year. While the bullish aspect is that US ending stocks (12/13) tightening to just 5.8mmt (-1.7mmt from 11/12). US export demand will remain strong well into the 2012/13 season due to tightening supply from Sth America, suggesting the lower anticipated ending US ending stocks.  Confirming the bullish sentiment to US exports was echoed in last week’s weekly sales at 4.03mmt (1.16mmt old and 2.87mmt new crop). Only 223kt of old crop sales are needed to reach the USDA target (35mmt) for the 11/12 marketing year. China has been much more aggressive in the export market recently, which is a good indication that USDA is too low with the old crop export estimate and that only adds to the bullish set up of the new crop.

Domestically, new crop wheat prices have remained relatively subdued since December, with east coast prices averaging $230 ($248 FIS WA). However new crop basis is -$15/t compared to +$50 this time last year.  The biggest bolter and more attractive price option has been  canola that has rallied $35/t since the end of Jan in WA, while on the east coast prices have rallied $25. However the full upside of both Matif rapeseed and Winnipeg futures hasn't been price in, resulting in declining basis. The wet summer in northern cropping regions and this week’s slow moving cold front over northern Victoria/NSW have got conditions looking cheery ripe for the winter cropping prospects. Whilst most over regions have experienced the usual dry summer.

As always 12/13 prices will be heavily impacted by Northern Hemisphere weather, with March critical for yield outlook for winter wheat and sowing prospects for corn/beans. Although a smooth sailing growing season is rare, it may happen. If there are decent yields we will be buried in grain (particular wheat), even if we have a poor yields there will still be plenty of wheat particularly in Australia after having back to back record crops. These scenarios should be considered when setting new crop pricing ideas.

Ukraine ease exports while Chinese demand keeps oilseeds buoyant

It has been reported that the Ukraine government and grain traders have agreed to only export 1.7mmt of wheat until June. Only about 100kt of wheat has been shipped this month.  This should limit 11/12 wheat (July – June) exports to 4.8mmt, the USDA currently has wheat exports pegged at 6mmt. Analysts have pegged 26% of the winter wheat crop as "good" compared to 56% this time last year. In lieu of this, much wheat will be replanted with corn (5m ha) in the spring. This would be an increase of 43% on 2011.

Corn has been the dominant export from the Ukraine this year (making up 58% of exports at 5mmt), as stocks swelled to a record 22.5mmt. More expensive US corn and a strong sales program after 2010 drought helped Ukraine to export an expected 12mmt this marketing year.  Strong sales from these countries has seen the US market share for global corn trade dip below 50% for the first time. US corn exports will ease to 43.2mmt (46% of world trade) from 52% last season as emerging rival countries muscle in on traditional US markets.

Thoughts that the market has bottomed out, which has resulted in a plethora of international tenders helped to support the bounce snapping a two day losing streak late last week. The US has won its second Egyptian wheat tender in a week, with 180kt sold at $259 FOB. Even with higher shipping costs ($27/t) it was more then $6 cheaper then French origin wheat. There was no Argentinean or Black Sea wheat offered for the first time, as winter woes continue to cause headaches for logistics. Iran bought 500kt of wheat (1.1mmt so far in Feb), along with Taiwan, Saudi Arabia, Libya, Israel. Highlighting consumer’s preference to lock in tonnage before ‘potential’ production concerns occur in Nth Hemisphere.

Russia will be back in the export game soon as weather conditions improve. However Russian origin offers were absent from the latest Egyptian (GASC) tender, and that was for April shipment!
India is also making some noise on future wheat exports, after USDA pegged wheat crop at record 86.87mmt.

News of further strong sales to China plus production uncertainties for southern Brazil helped to support the gains. Even the most bearish of soybean analyst, may have had second thoughts when the Chinese Vice President was seen riding shotgun on a tractor in a US Midwest soybean farm! China had just purchased 13.4mmt of beans during the week. Last year, China imported 56.5mmt, this compares to only 10.3mmt ten years ago. Southern Brazil would have all been priced in, and it would take a surprising yield cut to rally this market further.

Welcome rain throughout southern Argentinian (40 – 100mm) and Brazilian (2-40mm) growing regions over the last three days will be an added boost to not only maintain crop potential but also enhance crop prospects. An abundance of rain in most of Argentina and Brazil over the next couple of weeks will help to assure there are few problems threatening production going forward.  Some dryness concerns will remain in northeastern Brazil and subsoil moisture will still be a little low in northern Argentina, far southwestern Argentina, Paraguay and southernmost Brazil. But as long as timely rainfall occurs as advertised there should not be nearly the stress on crops that there has been in recent weeks.

Price's steady while NSW sorghum harvest trickles in

Growers who got back from school holidays over the last couple of weeks, will have noticed not much has changed price wise. Domestic prices seem content with their current phase of price stagnation, with wheat prices stuck within a tight trading range over the last couple of months. APW on the east coast has averaged $205 in February; this is the same as Dec/Jan. Growers who took a punt on feed grade, this gamble would have paid off with the FED discount at -$50 in early December, and this is now at -$15. Feed barley is well above harvest averages, but in February has started to dip lower. Growers are either cashing out remaining tonnage, or settling in for the long haul targeting sales over the next couple of months on potential hiccups on Northern Hemisphere production.


ABARES has increased the domestic wheat crop to 29.5mmt (+1.2mmt from Dec report), however some question marks still hinge on the accuracy of the NSW estimate. Nonetheless this will still place further pressure on world ending stocks, and logistics in trying to ship as much as possible before next harvest. Wheat exports were also increased to 22.3mmt (+4.71mmt from 10/11). Exports will need to average 1.85mmt per month, with only Jan exports eclipsing this figure, four months into the marketing year. Actually the Jan wheat export figure of 2.05mmt is the largest in eleven years. The lion’s share of this was from WA, where 890kt of wheat was shipped. And with WA groaning under the biggest wheat crop in history, a strong emphasis will be placed on a busy export program before next harvest.

The extreme wet weather in QLD/Sth NSW of the last couple of weeks has dissipated, with the hot weather allowing sorghum harvest pace to pick up. Although stormy activity remains around the Downs, delaying harvest in some isolated regions. Southern QLD harvest has provided very good yields and SOR1 quality, although grain size is smaller. Grower selling remains low with track prices at their lowest levels since mid Dec and $12 from the January high. No signs of end users and trade shorts yet, with delivered prices reaming steady.

Track sorghum has held a tight range all week but mostly just below $190 for Brisbane with a $5 discount to CQ ports. In delivered markets, Brisbane metropolitan region wasn't able to hold onto $200 delivered, and was down $1. Delivered Downs, also decreased $4 ($174 AWB) as buyers look for spread deliveries and no prompt destinations.

Moree region is yet to access flood damage with harvesting likely to pick up during the week and disclose the full extend of quality damage, and top of yield and area losses. ABARES have decreased their NSW sorghum crop size by 19% (668kt) compared to last year mainly by less area being planted to around 185,000 ha. However higher yields overall will compensate for flooded area and reduced yields around Moree. Some growers have started to tentatively deliver the odd load into Northern NSW sites with early quality very poor.

Newcastle track sorghum has held a tight bid range all week, with Toepher paying the better money at $189 port. Buying interest resurfaced into Newcastle as supplementary for rail deliveries for a late February shipment. While the next shipment is for a Toepher vessel (30kt) in March, which could explain Toepher offering the best track prices trying to snuff out as much tonnage as possible.

US wins Egyptian Wheat tender as Black Sea ports freeze over.

In what may be a short-term shot in the arm for international wheat futures this week, Egypt has purchased their first cargo of US origin wheat since June 2010. Australia’s last wheat bought from GASC was also in the same tender. Since July last year, GASC has imported an estimated 4.6mmt of wheat, of this Russia has taken the lions share (70%), followed by Ukrainian (9%), Kazakhstan (7%), French (6%), Argentinean (5%) and Romanian (3%) origin.

Confirmed purchases since 2012 (475kt) has shown a more equal billing of sellers, with French wheat largely filling the void at 50%. Followed by Russian, Kazakh, Ukrainian and US which are all only around 12% each. Actually the three cargos of Ukraine wheat were later switched to Russian origin after ‘contaminated grain’ was found.

The winning US origin wheat was at a level well below both French (by over $20 FOB) and Russki wheat offers ($30 fob premium!). Due to stocks being located further upcountry and winter logistics woes, Russian FOB offers have not been competitive as they once were and thus export pace has slowed. Russia’s Ag Minister reported July-Jan cumulative grain exports at 20mmt (+80% from last year’s pace). However monthly exports are sharply dropping off from earlier highs, when the country was exporting close to 3mmt a month.

Earlier this month there was noise that Russians may put in place tariffs to stem the tide of high exports from the country. However the government raised the export limit to 27mmt, this is 4mmt higher then the original number first floated last October. Last years bumper grain harvest of 93.9mmt has stock still at comfortable levels.

Grain exports  (July – Jan) from neighboring Ukraine are estimated at 11.6mmt. With some pundits already knocking off 50% from the winter wheat crop potential, in lieu of lack of snow cover/extreme cold combined with dry sowing period late last year. Because of aggressive wheat exports last year on the back of bumper harvest, grain shipments by rail have been suspended and the Ag minister is telling the trade to focus on corn, rather than wheat export sales. This may pave the way for future grain tariffs being implemented if the winter wheat crop doesn’t recover in the spring.

Ukrainian exports have only been free from tariffs for little over a month, as barley was taxed until the end of 2011 and corn/wheat tariffs were axed in October. Before last years harvest, quotas limited exports for seven months following the summer drought in 2010.

Wheat had previously declined 38c over the last four sessions, as the lead up and subsequent hangover from Fridays USDA report had the trade booking in short term profits. Prior to the report wheat had rallied 82c over ten trading sessions during the Jan/Feb period, before being curtailed by surprising higher world record wheat ending stocks (213mmt).

Current world ending stocks do look ugly, and there will be a lot of bearish news out there in the foreseeable future in regard to huge ‘intended acreage. However there are plenty of potential production hot spots that may flare up over the next couple of months. Drought is damaging US winter wheat for the second year in a row. Canadian prairies are extremely dry from a drought beginning last August. While the above mentioned Ukrainian situation may be a full-blown disaster. While Chinese production hasn't hit any head lines yet..!

USDA predicts bin busting wheat stocks......AGAIN!!

Latest USDA report was largely in line with trade expectations, with modest cuts to Argentinean corn/beans whilst Brazilian beans were also cut. What was considered surprising was world wheat ending stocks was increased by 3mmt, to a new all time high of 213.1mmt. This level has eclipsed the previous high set last decade, while consumption was reduced by 1mmt (680.48mmt). Wheat stocks were helped largely to an upgrade to the Indian wheat crop (+800kt to 86.8mmt). Whilst reductions were made to Ukraine (-1mmt to 6mmt) and Canada's (-500kt to 17.5mmt).


World soybean production (257.47mmt) was reduced by 5.5mmt largely from cuts to South American production. Brazil (-2mmt to 72mmt), Argentina (-2.5mmt to 48mmt) and Paraguay (-1.2 mmt to 6.4mmt). However this would still be the third largest South American crop in history, but many expect further cuts to happen. Although production may have stabilised in some regions of Argentina, further cuts may need to be made especially with dryness in key states in southern Brazil. After a disastrous January, February conditions have turned around sharply in Argentina with frequent showers hitting key growing regions.

USDA lowered world corn production (864mmt) by 4mmt largely on the back of cuts to Argentinean production (-4mmt to 22mmt). There was no reduction for Brazil, with prospects looking good for their secondary smaller winter plantings that have kicked off. World corn ending stocks (125.33mmt) continues to fall, while US ending stocks (20.34mmt) fell 1.14mmt. This compares to 43.38mmt in 2009/10. Stocks to use ratio falls to 6.3%, which would be the lowest since the 1995/96 marketing year.

Ethanol margins are getting squeezed tightly with reports coming through of slowdowns amongst producers in the US now that the 45c tax break has gone. The effects of the removal of the ethanol blenders tax credit, will mean reduced demand for corn from that sector, but also lower DDG (Dried Distillers Grains) production that competes against other feed grain sources. DDG usage is not track by the USDA in their feed grain usage, and with 127mmt of corn being used in ethanol production; this could mean something around 40mmt of DDG being substituted locally and in the export market.

Ukraine has reported that 2.5 - 3m ha of winter grains would likely be lost and re-sown (out of 8.5m ha total), up from a 2.5m ha estimate previously. Although the recent cold snap will potentially cut production in Eastern Europe, main production regions of France, Germany and UK have fared much better. Winter wheat and rapeseed was planted on much wetter soil profile and has enjoyed favourable conditions before dormancy.  The ‘unknown’ damage is always worse then the ‘known’ damage, which is hard to quantify until spring growth resumes. 

Although it is still very early days into 2012, there are plenty of potential production hot spots that may flare up over the next couple of months. Drought is damaging US winter wheat for the second year in a row. Canadian prairies are extremely dry from a drought beginning last August. Ukraine wheat may be a full blown disaster from historic drought and winterkill losses. Whilst potential bullish patterns are becoming more apparent in the oilseed complex. Continued erosion in South American yields, EU winterkill, looming jostle with corn/beans for US acreage and booming canola exports. There is little room to move for Nth American production adversity, and this should provide underlying support until yields are finalised.

Sorghum harvest kicks off in QLD

This week’s heavy rain, particular in the north of the state will give winter cropping prospects a good boost. Many regions had a minimum of 25mm, while 50 – 100mm was common in the north of the state. Even though we are still in the first week of February, many regions have experienced above average rainfall over the past four months. Moree is 340mm above average, while Forbes (+185mm) and Wagga (+165mm) has had a wet summer.

Cotton and sorghum growers across southern QLD/Nth NSW will be enduring a tense time, with crops either inundated or hopes that levee banks will be able to hold back the floodwater. The La Nina weather pattern is once again proving its potential for extensive and extreme monsoonal wet weather. With several weeks yet to run of the wet season, farmers will be watching the weather maps carefully.

Harvest has commenced on the Downs, which did not receive the excessive falls experienced in the more western regions of southern QLD. Clear Grain exchange even had its first trade at the central Darling Downs Graincorp receival site of Brookstead. Downs crops look in good condition with above average yields expected. Pressure will come onto the handling system with the large carry over of winter crop in the system, with end users looking to capture cheaper grain during harvest. The recent rain will create new headaches for logistics, with rail continuing to undersupply the export markets providing strong delivered bids to attract ex farm stocks to meet export commitments. Only 337kt of wheat exported over the past 7 days, and a former colleague has told me they have had a ship on demurrage for two weeks off the QLD coast..!

Track prices continue to have good depth, with six traders at similar values. Prices are unchanged for the week at $190 Brisbane, with CQ ports at a $5 discount. While delivered prices into end users are showing a $10+ premium, this may balloon out if logistics continue to be strained.

Looking forward to new crop canola prices have rallied $15 over the last week to reach the contracts highest price since end of November. This is on the back of a rallying international oilseed market in both European (+€15) and Winnipeg futures (+ C$12). Thoughts that severe cold weather in Central and Eastern Europe may harm winter rapeseed crops where snow coverage isn’t adequate helped to support.

Although still very early days, warm (+9˚C above average) and dry conditions across the Canadian prairies have the market tentatively adding in potential production risk. On the positive side the risk of a wet spring (which plagued sowing and reduced acreage the previous two years) won’t be an issue in 2012, and both Canadian and American growers are planning on planting record acreage of canola that will pressure prices going forward.

Although it has been dry across the Prairies there is adequate subsoil moisture to kick off plantings in the spring. However due to lack of topsoil moisture, rains will be required to be timelier.  Forecasts are calling for La Nina to be lingering until June; this could present some potential moisture stress issues.

New crop feed barley continues to gain in value, +$10 for the week, and a whopping +$25 since the start of 2012. The malt/F1 spread is now at $31, compared to the Jan average of $52. 2012/13 APW prices remain stuck in a tight trading range, with current prices, just $2 higher then the previous three-month average

Markets rally on winter woes

International markets over the week continued to rally, with soybeans leading the charge (+46c) followed by wheat (+17.5c) and corn (+10.5c). The bulls have stopped focusing on Sth American weather and have moved their attention to Europe. And in particular the extreme cold in the East that is forecast to damage already drought ravaged winter wheat and rapeseed crops. The extreme temperatures in southern Russia (-32˚C), Ukraine (-21˚C) and Germany (-17˚C) have the trade attentively building in winterkill premiums. Losses will vary widely and the situation will be speculated widely until spring growth begins in a couple of months. Cold weather will also continue to exacerbate the logistics of getting grain into export channels in the Black Sea.

At the end of last week there was noise that Russians may put in place tariffs to stem the tide of high exports from the country. However the government raised the export limit to 27mmt, this is 4mmt higher then the original number first floated last October. Last years bumber grain harvest of 93.9mmt has stock so far still at comfortable conditions. Due to stocks being located further upcountry and winter logistics woes, Russian FOB offers are not as competitive as they once were and thus export pace has slowed.

The dollar continues to be in the nosebleed section, exacerbated by the Reserve Bank maintaining interest rates on Wednesday. This has the dollar at six month high against the greenback at 108c Combined with an increasingly negative basis, stifles cash prices in rallying. The bumper sorghum harvest will continues to be delayed, but higher yields will compensate for any flooded acreage. Winter wheat sowing prospects in Nth NSW and QLD is looking favourable after the rain whilst the rest of the country is having a usually dry summer.

With prices still trading at long-term highs, get set to hear near bearish daily ‘guesstimates’ of more land being put under the plough for record acreage. Also additional land (up to 7m acres) is also set to exit the US Conservation Reserve Program this year, after laying fallow for some years. The USDA has pegged total grain production this year in Canada at 50.3mmt (+8% from 2011). This rests largely on ‘hopes’ of more favourable planting conditions after the previous two wet springs. Warm conditions continue to persist across the Prairies; last week temps were 9˚C above average.

Indian government has pegged this year’s wheat harvest at a 88.3 mmt record (+2.8% from last year). However burgeoning the middle class is eating into any rise in production, with consumption also on the rise at 84.7mmt, +13mmt over the last couple of years.

After earlier extreme dry weather in January, Argentina weather has turned favourable. Although it may be too late to enhance yields in corn, soybeans will react favourable. Ministry of Agriculture has estimated that 64% of the crop is good - excellent (+8% from last week). A mix of rain and sunshine is expected through the next two weeks and most locations should receive enough rain to support crop development.  Rain will be nearly widespread in the heart of corn and soybean country today into Thursday. Meanwhile, scattered, light rains are likely to delay harvest efforts in some central and northern production areas of Brazil again this week.

The bullish momentum from both corn corn pit originated from thoughts that an increase in US exports business is expected as traditional Black Sea countries (and potentially Sth America and Argentina??) will start to restrict exports. But recent strong sales may take a hit soon with new crop South American beans hitting the market over the next couple of months. Ethanol margins in the US are also creeping lower, which may cut into forecast demand.  The domestic ethanol industry accounts for 40% of the entire US corn crop (313.8mmt).

Domestic prices continue to trade in narrow range

Not much fundamental news to sink your teeth into this week, South American weather continues with Argentina now getting lashed with regular rain, but it may be too late to salvage corn crops, but a boost to later maturing beans. More talk of the expected Russian wheat ban/tariff, continuing weather concerns and more optimistic news out of the EU budget agreement helped to provide some bullish mentality. The US Federal Reserve intends to keep US interest rates unchanged near zero through 2014, which made the greenback sharply lower and supported agricultural futures overall. The AUD rallied on the news, and has now gained nearly 10c in two months against the greenback. While the AUD against the loonie has been trading at the highest levels since 1997.

Domestic prices have been flat over the last couple of months. APW prices have been fairly stable struggling to reach pre harvest price zone. It seems the high demand for feed barley has waned, with prices slowly creeping back $4 over the last week, after slowly rallying $16 since the start of December.  The extreme wet weather in QLD/Nth NSW was more focused on coastal regions (Coolangatta 400mm), while inland key sorghum growing regions ranging from CQ to the Downs and Liverpool Plains received between 40 -70mm over the last week Sorghum crop losses will not be large but may change planting intentions of CQ growers. Depending on the intensity and duration of the rain, some growers who have sprayed out crops are expressing some quality concerns.

Continued concerns of winterkill damage for parts of the Black Sea region and parts of Eastern Europe help to support gains over the week. Temperatures in the main winter wheat regions in southern Russia got to -17˚C and -24˚C in northern Volga regions. The forecast over the next week is predicting temps will be -15˚C below average. These regions have received little snow of late, raising the risk of winterkill.

Egypt has rejected a cargo of Kazak wheat, and switched the remaining three cargos to Russian origin as “unauthorised seeds’ were found. It will place further pressure on Russian logistics. Renewed fears that the Russki’s will be phasing in export tariffs, also helped the bullish momentum.  Why is this coming to a shock, everyone knew these tariffs/ban would be implemented when they were first mooted this mid last year…!

The US southern plains will continue to see dry conditions over the next week, although winter wheat crops are still dormant forecast warmer weather might induce an early emergence. Topsoil will likely become drier, reversing the trend of November and December when soil conditions were improving.  After the previous weeks cold snap, warmer weather (+7˚C above average) has returned to the Canadian Prairies with rainfall 40% below normal over winter in some key spring wheat regions.

The latest COT report showed that fund traders hold a larger than expected net short position. Talk that the hefty (near record) net short position from fund traders might spark aggressive short covering over the near-term helped to support. This may have helped to limit the selling.

Deteriorating conditions in major export countries, helping boost US exports has been the positive news of late. Despite an increase in US farmer selling, cash-market levels have remained strong, an indication that supply/demand fundamentals are tight at the moment. USDA ending stocks estimate for the 2011/12 season is still at a historically low 21.48mmt (lowest since 1995). Forecast higher usage (exports, ethanol, feed) even at current high prices, is likely to cut into an already tight balance sheet. Corn basis particular in export channels that service the Gulf of Mexico were weaker, but still historically strong. Last week basis was +100c/bu higher in some locations.