MARKETS OUTLOOK

Grain prices bounce as surplus starts to shrink

by John Buckley

Traders are still

debating how far
this years Russian
wheat crop will
decline after a dry
start, a higher risk
of frost damage and
difficulty financing
spring sowings. A
10-15m tonne fall
would probably
encourage the
government to keep
some sort of controls
on exports, probably
an extension of this
seasons temporary
duty

72 | Milling and Grain

Grain prices have steadied in recent weeks after their long drop amid further signs that 2015/16
supplies will be less loose than this seasons - if not exactly tight by historical comparison.
Several factors support this view. In the wheat market, analysts are looking for a decline in
this years Russian, Ukrainian and European crops, possibly the USAs too (less sown, more
winterkill, droughts etc). As we go to press the trade is also getting excited about a possible
major flood loss for Indias crop (the worlds second largest wheat producer and consumer).
How much may wheat production decline? The UN Food & Agriculture Organisation recently
suggested the next crop could still get to 720m tonnes just 7m short of last years record.
That might seem a bit optimistic given all the above factors (more detail on those below). The
International Grains Council meanwhile offered a preliminary assessment of 709m (it remains
more conservative on last years too at 719m) while the Canadian Wheat has just come out with
the lowest estimate of just 703.4m (versus last years 724.8m).
But does the world actually need another 720m tonnes-plus harvest? Probably not. Last years
consumption, after all, was estimated at less than 715m, resulting in a 10m tonne stock buildup
that will help cushion the impact of a smaller 2015 crop.
Until recently, that 2014/15 surplus had been weighing heavily on prices which hit five year
lows last autumn and recently seemed to be heading back in that direction again. Can we expect
another season of consumption growth pacing last years 10m tonnes (mainly in animal feeds)?
The IGC projects a mere 3m tonnes increase in next seasons total wheat consumption at 711m
which would reduce ending stocks by just 2m tonnes (from this years 198m. Its possible if
maize competition in feeds recedes a little (again, see below) and wheat prices are competitive
enough. If not, then wheat markets may be more or less in balance or need only a modest stock
drawdown. None of this is the stuff that bull markets are made of.
While the direction winter wheat output is taking is becoming a bit easier to pin down now,
most of the key spring wheat crops had yet to be sown as we went to press. Agriculture Canada
recently estimated a similar area to last years for its own spring wheat crop (the bulk of its
annual wheat harvest) while the countrys Wheat Board sees the total crop down from 29.3m to
28.7m tonnes. The EU is also expected to so somewhat less than last year. Russia and Ukraine,
whose winter wheat crops appeared to be floundering from the word go, would normally be
expected to make up expected any losses to these with more spring sown crops. But, as detailed
in our earlier reviews, both are under considerable financing restraints from their weak currencies
(expensive input) and credit difficulties (including soaring interest rates).
So how low might this years Russian wheat crop
go? The government has recently reiterated its view
that the total grain crop can make 100m tonnes
(versus last years 105.3m), maybe a couple of million
more as some winter crops came through in better
shape than expected earlier. That, western observers
say, would imply wheat around 55m tonnes. However,
not everyone agrees, give that the countrys ag
ministry recently estimated winter losses of almost
17% of the crop while acknowledging that 9% of
what did come through was in poor shape. Consultant
Sovecon suggests the grain total (including spring
planted crops) could be in a range of 85m to 92m
tonnes, with wheat contributing somewhere between
47m and 53m. Even lower forecasts have been aired
(75-78m grain total) although these are worst case
scenarios that are probably too pessimistic now.
Meanwhile, due to their recent export controls, both
Russia and Ukraine will have larger wheat stocks

to carry into the new season (about 6m more tha last year in
total). Both can therefore be expected to maintain a fairly active
presence on the world markets but probably nowhere near the
record levels of recent years. The CWB suggests both Russian
and Ukrainian wheat exports will drop by about 12% to 17.4m
and 9.7m tonnes respectively. It also sees Canadian wheat exports
falling by 11% to under 21m tonnes but expects the EU and US
to take up much of the slack with higher exports of Europes
rising t a new record 32.35m and the USAs from 24.5m to 27.6m
tonnes. (These are all interestingly precise forecasts for this early
stage in the year and, as in most years past, will doubtless be open
to a fair amount of revision as the season unfolds)
Europes wheat crop is expected to decline in terms of both area
and yield. Some early estimates had the total, including durum,
3m to 5m tonnes below last years giant 155m tonne harvest.
More recently, grain trader lobby COCERAL came out with a
10m tonne drop for soft milling wheat at 138.6m tonnes. The
EUs own crop forecasting unit MARS sees soft wheat yields
dropping by 4.8% to an average 5.29 tonnes per hectare. Dryness
has become a bit of a concern in Germany, the Czech republic and
Poland. German yields alone are seen dropping by 11.7% while
Hungary and Rumania are also expected to yield significantly less
than last year .
That supplies in the EU will still be more than comfortable is
underlined by the fact that (a) the EU will also carry in over 5m
tonnes more stocks this season than last and (b) various observers
including the EU Commission think these will actually rise again

in 2015/16 (even with another year of record exports) to a 10-year

high of around 19.5/20m tonnes. Again, that hardly seems a recipe
for higher wheat prices going into the new season that starts in
July.
That said, the major northern hemisphere wheat exporters crops
include a fair proportion of as yet unsown spring wheat and the
entire crop still has to reach harvest and get safely in the bins.
How do the markets view this set-up influence forward wheat
costs? The CBOT futures market has current cash wheat prices
just under $5 per bushel about $184/tonne. For mid-2016 it
predicts prices 10% higher at around $5.50 ($202/t) and for
those who want to ponder the more speculative 2017 view, it
has starting prices of $5.67 softening by mid-year to $5.62/bu

April 2015 | 73

J_qp_new.indd 1

($206). The EUs own milling wheat futures market has

recently been trading 185/190/tonne, quoting similar
prices well into 2016 and a fairly modest 5/tonne
premium into mid-2017. While futures often get the
price revelation wrong (they tended to predict higher
rather than the lower prices that actually developed for
the last couple of seasons) the current price structure at
least confirms that most participants are fairly relaxed
about the forward outlook for wheat supplies.
Less maize this year
The key question emerging for the maize market in the season
ahead is not whether but by how much will the global surplus
fall? Some early markers have already been put down by the
International Grains Council looking for a potential drop
in 2015/16 production from 990m to 941m tonnes while the
Canadian Wheat Board saw a smaller decline to 973.5m tonnes.
While technically counted as 2014/15 crops, the South
American harvests for the current season have still to be resolved
with planting only recently completed for the Argentine crop
and, as we went to press, still underway for Brazils second or
Safrinha crop the part that determines its export supply and
thus its impact on the world maize market. At this stage, both
countries are expected to produce rather more than the USDA
predicted in March (75m for Brazil and 23.5m for Argentina).
Both have only just got into marketing these crops, discounting

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74 | Milling and Grain

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the US price by about $8 to $10 per tonne and, along with last
years record US and (though down) still relatively large CIS
crops, helping to keeping the world export cost of maize at
relatively cheap levels compared with recent past years.
During early April, all eyes were on the US planting intentions
report from the USDA its first survey-based forecast for the
new season. The trade had been expecting US maize area to fall
by 2m to 3m acres from last years 90.6m. On top of that a repeat
of that crops record (171bu/acre) yield was also thought unlikely.
In the event the USDA forecast a decline in area of just 1.4m
acres which, along with a higher than expected estimate for US
March stocks immediately sent US prices lower. The effect might
be short-lived, however, as current wet conditions in the US
southern states are holding up early planting and making a switch
to soyabeans which can be planted later more likely in this
region. So does the corn/soya price ratio which has increasingly
favoured the latter crop.
EU maize putput is expected by COCERAL, the grain trade
lobby, to drop 10% to 66m tonnes from last years 74m. Within
the CIS countries, tight finance and weak currencies boosting
input costs are also expected to lower maize planting and
production. As we go to press, the Ukrainian consultant APK
Inform is forecasting its crop will decline by almost 15% to24.3m
tonnes. On the face of it, all this points to a smaller world maize
crop in 2015 but how much smaller? Estimates range from a
30m to a 40m tonnes drop or more. But against that have to be
counted this seasons larger carryout stocks
Based on its global maize forecast for 2015/16, the IGC has
calculated a potential drop in world carryover stocks for the new
season of about 20m tonnes to 171m. That sounds quite a fall but
it would still leave them at their third highest level since Y2K
hardly a signal for runaway maize prices.
Global feed demand for maize, the largest single outlet, is
expected to show an increase of just over 24m tonnes for the
current season, ending August 31 compared with 55.4m in
2013/14. That suggests other uses are more or less stagnating
after a 33m tonne increase in these sectors in the previous season.
A large chunk of that is clearly down to the dramatic slowdown
in growth of corn ethanol production amid the collapsing price of
crude mineral oil.
Recent maize price trends have been erratic, waiting on more
concrete new crop pointers and subject to fund money ebbing
and flowing in tandem with macro-economic factors like the
strength of the US diollar, the weakness of the euro and attempts
to rally the collapsed price of crude oil. These factors seem likely
to continue creating volatility into second half 2015.
PROTEINS soya surplus keeps on growing
Given the unprecedented weight of supplies overhanging the
soyabean market, its slightly surprising that prices have held up

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104/105m tonnes. Thats 3m to 4m under last years which was

about 10m larger than combined export and domestic crush needs.
Weather permitting, then, the soya surplus goes on through late
2015 when attention will turn back to the next Latin American
crops.
Accounting for about half the worlds oilseeds and over two
thirds of global oilmeal production, amply- supplied soya will
remain the main influence on the smaller oilseed/meal markets,
whose supplies are expected to tighten somewhat this season.
Rapeseed output is expected to drop mainly in the EU and CIS
countries. Sunflowerseed crops are expected to decline within
both Russia and Ukraine. Nonetheless the global oilseed market
will remain in huge surplus and the large stocks of soya carried
from one season to the next will be available to crush for more
meal if the market demands it.
All this spells a fairly placid, possibly cheaper meal market
ahead in dollar terms at least. For consumers within the
Euro-zone, the equation is spoiled by the weakness of the single
currency, constantly offsetting price declines in supplier markets.

KEY FACTORS AHEAD

as well as they have in the last couple of months. Partly thats

been down to some delays in the harvest and marketing of South
American crops, exacerbated by some transport strikes in Brazil
and some threatened farmer/port stoppages in Argentina too. That
has kept demand for US soyabeans strong at a point in the season
when this really should be tailing off in favour of the South
American suppliers. However, barring some cataclysmic US
weather upset in the weeks and months ahead, this is really only
delaying the eventual, inevitable, price response to the supply
outlook.
If anything, there may be even more soyabeans to dispose of
than we expected back in February. Now that the Latin America
crops are well into harvest (which is almost over in the main
Brazilian producer states), stellar yields have been encouraging
some observers to go for a higher regional crop estimate.
To recap on 2014/15 supply, the US crop soared by 16.6m
tonnes, Brazils is seen up by 8.5m and Argentinas by at least 2m
(but now, probably more like 4m tonnes). So world production
increases by 31/33m tonnes or over 11% - maybe even more.
Global crush on the other hand, is seen rising by only 13m tonnes,
the remainder mostly added to stocks carried into the 2015/16
season that starts in September. These, not surprisingly, will be
record high at around 90m tonnes, so a world awash with soya is
moving from prediction to reality.
In late March, the USDA released a slightly lower estimate for
this years US planted acreage at 84.6m versus trade expectations
of 85.9m but still up on last years 83.7m and a new record
high. Many US analysts still think this under-rates what farmers
will actually sow. Assuming normal weather, planted/harvest area
ratios and trend-line yield, it extrapolates to a potential crop of
76 | Milling and Grain

WHEAT
Traders are still debating how far this years Russian wheat
crop will decline after a dry start, a higher risk of frost damage
and difficulty financing spring sowings. A 10-15m tonne fall
would probably encourage the government to keep some sort
of controls on exports, probably an extension of this seasons
temporary duty. Ukraine may also be a more cautious seller
if its crop declines somewhat as expected. Both at least have
larger stocks to carry into 2015/16 but Russia particularly may
want to conserve more of these until its domestic food price
inflation (and its troubled economy) settles down. A smaller
role played by Russia and Ukraine in the world wheat export
market wouldnt mean tight supplies but it would keep prices
off the floor set by these two traditionally cheap sellers in
recent years.
Condition ratings for the key US winter wheat crop are not
great but at last better than last years. That suggests better
yields to compensate for a slightly lower planted area. The
total US wheat crop size wont reach the levels seen in the past
but given importers increasing preference for other, cheaper
origins, it should be adequate to meet demand.
European crops are mostly looking good, especially the key
French crop, which could set a new record. Some analysts
even see the EU wheat total approaching last years all-time
peak (versus a 5m to 7m tonne drop expected earlier). Along
with large carryover stocks, this spells an abundant EU wheat
supply to meet both domestic and export needs although, as
always, the summer months will decide how much of it comes
up to adequate milling specifications.
Among the other key exporters, Canada expects to sow a
similar crop to last years. Right now, its spring planting
weather will be the key to success. Australia meanwhile seems
to be getting some needed rains just in time before its main
planting season.
World stocks of wheat carried into 2015/16 remain hefty, a
cushion against any crop weather problems in the months
ahead.

 The drop in wheat values close to or, for some farmers below,
cost of production remains an issue that may affect future
sowing plans.
Global feed consumption of wheat is expected to rise by about
9m tonnes this season, if remaining below the high levels of
three years ago. But will ethanol use of wheat reach expected
levels in Europe under the low oil-price scenario?

than expected demand for these products in countries developing

livestock production systems China, India, Indonesia etc.
Developed consumers like the USA may also use more as high
meat prices contribute to profitability. Fortunately for consumers
worldwide, the supply outlook remains good.
The slowdowns and reversals seen in global rapeseed and
sunflower crop expansions in the past year are likely to be
extended in 2015. However, as oil-rich oilseeds these will
have less impact on the meal sector which will take its main
cue, as usual, from the all-powerful soyabean market.
That suggests soya meal will raise its already dominant share
of the protein market. As the high-protein, reliable quality
product too, soya will hopefully continue to force price
restraint across the meal sector.

COARSE GRAINS
How much maize will the US sow in 2015? Current forecasts
suggest a cutback but still enough for another large crop which,
with large carryover stocks from 2014, should keep this market
well-supplied.
Ukrainian and Russian maize crops will decline this year but
F/V/G(Island):2015 28/10/14 09:46 Page 1
remain very large by comparison
with the previous decade,
keeping Ukraine especially in
the van of international export
competition.
Along with ample maize
supplies from Latin America,
this should maintain the more
competitive global export market
for maize that weve seen in
recent years maybe not at quite
the same frenetic pace but still
likely to demand some restrainr
from world maize prices.
A record domestic maize crop
has enabled EU consumers to
slash imports this season the
main factor in a lower global
maize trade. A smaller 2015 crop
may affect demand patterns here.
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livestock feeders costs.
How much maize will the US
ethanol industry use if the price
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April 2015 | 77