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World wheat markets had a poor start to the week as traders digested the bearish United States Department of Agriculture (USDA) World Supply and Demand report published last Tuesday. The report signalled ample grain supplies for the coming season and US wheat futures fell to lows not seen since last September. However, prolonged dry weather is adversely affecting the wheat production prospects for some of the primary producers across the Northern Hemisphere and leading officials and analysts to lower their crop estimates. This triggered a wave of buying mid-week and wheat futures rallied sharply.
The most significant impact on yield potential is being seen in southern Russia, which seems to continually miss any significant rainfall. The Ministry of Agriculture of the Russian Federation cut 5.3 million tonnes from its updated grain production estimate and now estimates that the country will produce one million tonnes less than it did in 2019 at 120 million tonnes. Russian farmers, in contrast to those in the UK, enjoyed ideal winter drilling conditions and it was thought that, as a result, the country was set to produce a wheat crop close to the record 85 million tonnes achieved in 2017. The Russian Institute for Agricultural Market Studies (IKAR) has again cut its wheat production estimate. It is now down to 76.2 million tonnes.
Drought conditions impacting on countries in the north of Europe lead the EU crop monitor MARS – which stands for 'Monitoring Agricultural Resources' - to cut its wheat yield estimates for 2020 to 5.72t/ha from what was previously 5.87t/ha. This effectively knocks 3.5 million tonnes from the supply side of the EU wheat balance sheet.
The US is not immune from dry conditions harming crops. Kansas is the primary US winter wheat producer and a crop tour this week found winter wheat yield potential to be much lower than official estimates. The national crop condition ratings fell one point to 52% rated 'good to excellent'. This is well below last year's rating of 66%. The US wheat area is thought to be the lowest on record.
UK farmers voiced their increasing concerns over the extended dry and warm period this spring with reports of stressed crops. There is little rain in the forecast and, with temperatures rising, there may not be any short-term relief. Record rainfall during the autumn and winter months prevented a normal drilling programme. As a result, the UK wheat crop is set to fall to as little as ten million tonnes, even with near-average yields. The ability to achieve this must now be in question and London wheat futures rallied sharply amidst these crop concerns, helped further by sterling weakness against the euro.
Prospects for a significant rise in the size of the US corn crop look set to be achieved as the fast drilling pace of US farmers continued this week. By last Sunday, US farmers had planted 80% of their crop, which the USDA estimates will produce 406 million tonnes of corn - 59 million tonnes up on 2019-20. Excessive rain last year left farmers with millions of acres unplanted and, at this point in 2019, only 44% of planned cropping was in the ground.
US corn futures continue to hover just above the recent contract lows, taking comfort from some positive news. US ethanol production rose for the third consecutive week to 663,000 barrels per day. However, there is still some way to go. Peak production back in 2017 reached over 1.1m barrels per day. The USDA predicts ethanol demand for corn this season will be just below 126 million tonnes - 11 million tonnes down on the previous year. It also reports 2020-21 US year-end stocks will rise to over 84 million tonnes - a 33-year high. This bearish factor may temper wheat prices.
UK feed barley values found support from several directions this week, as grain markets firmed on a continuation of dry weather across key global production areas, particularly in the EU and Black Sea regions. Sterling also slumped across the week which further supported values. Spring barley crops, which make up a significant area of the 2020 UK barley area, are in need of rainfall across the UK and are starting to show signs of stress with very little signs of respite in the short- to mid-term forecast.
Last week's Frontrunner mentioned the threat of significant tariffs to be imposed by China on Australian barley exports. Tariffs of 80% were formally put in place at the start of this week to be implemented across the board, effectively ending any Australian export trade to China. China has traditionally represented the largest market for Australian feed and malting barley exports, reaching a peak of 5.9m tonnes in 2016/17. And, with demand from other south eastern Asian markets for barley considerably less, Australia will have to look elsewhere, such as the Middle East, for alternative markets.
Dry weather remains for northern regions of Europe whilst southern countries have seen favourable spring conditions. France has been split in two, with northern regions not seeing any of the rainfall that has steadily fallen across the south of the country over the last few weeks. Dry weather, combined with the prospect of increased trade to China, saw French feed and malting values firm at the start of the week. Meanwhile, in Iberia, both spring and winter barley crops are showing good potential with the latest MARS crop-monitoring report pinning Spanish winter barley yields at an 18% increase on last year and spring barley yields at a 5.4% increase. Increased yield prospects could result in a much smaller import requirement for crop 2020 from these countries.
It's been a good week for domestic rapeseed prices with UK new crop supplies gaining £10/t since the last report. This is due to a combination of a 2% devaluation in the value of sterling and a five euro gain in European futures prices. As lockdown restrictions are eased, it is anticipated that fuel demand will bounce back in the coming months, and this will help to ease the pressure in the biodiesel sector, which accounts for roughly half of all EU rapeseed oil demand. On the supply side, there are continuing concerns over crop prospects and, given lower starting stocks, the EU is faced with its lowest supply of rapeseed for 14 years and five million tonnes less than the record supply of 23.2 million tonnes recorded in 2017/18.
This squeeze on home-grown production will generate increased demand for imports to meet demand for both oil and meal in 2020/21. Ukrainian production is expected to be sharply lower, leading to an increased reliance on Canadian and Australian supplies. This season, the EU has provided a 'welcome home' for Canadian seed at a time when the country has been facing political difficulties with gaining access to its traditional Chinese market. However, this situation is capable of changing quickly. Australian production is a long way from being secure at this early stage in its crop cycle. The EU will not see supplies from the Southern Hemisphere until December at the earliest, so domestic markets could be quite tight in the early months of the new campaign.
With the dry weather raising a few concerns over the growing crop, pulses have just about stopped trading for new crop. At the current high levels, feed beans do not calculate into domestic feed rations, especially when considering other raw materials. Rapeseed meal for delivery in September and October is currently valued at a £5 discount to feed beans and that's for a product with 35% protein compared to beans at 25-26%. Demand in Egypt is also very slow, as Ramadan enters into its final days and new crop offers from Australia are very competitive compared to UK values.
The next market moves will be dictated by the weather and the value of sterling as we try to assess where demand is coming from as the world emerges from lockdown after Covid-19.
It's been another quiet week on the markets with no changes from last week. Imported ammonium nitrate (AN) stocks remain low with currency not helping the market this week as the pound versus the euro moved from 1.14 to 1.11, making imports more expensive whilst firming wheat prices. In Europe, suppliers moved to July sales tonnage at a small increase over original price releases last month. Take-up of these offers is unknown, with large retailers historically taking the early offer, especially given current gas prices. There is no news as yet on when CF Fertilisers will release new season prices. In recent years, the release date has varied between mid-May to mid-June, so watch this space.
Demand has dropped off the cliff with weather, again, being the issue. With rain forecast over the next 24 hours, much depends on how much rain arrives, and where it falls, as to the next level of demand. Foliar nitrogen may be one way to keep these crops moving if we cannot get enough nitrogen from the soil.
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