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Bear in mind, bulls: Correction is near

03 November 20208 min reading

Elena Faige Neroba Business Development Manager Maxigrain

Wheat continues its price rally ignoring production growth in Russia, Canada and Australia. There is a lack of supply of feed and low protein grains on the market. The line-up is extremely tight before the Southern Hemisphere harvest reaches the market, but Argentina and Australia will actually not ease the price rush much. Over the past two weeks, tenders have been held by all key importers, and prices were further supported by news of a lockdown in Europe.

Wheat continues its price rally ignoring production growth in Russia, Canada and Australia. There is a lack of supply of feed and low protein grains on the market. The line-up is extremely tight before the Southern Hemisphere harvest reaches the market, but Argentina and Australia will actually not ease the price rush much: part of the harvest has already been contracted at a fairly high price. Over the past two weeks, tenders have been held by all key importers, and prices were further supported by news of a lockdown in Europe. Quality requirements were simplified by Egypt and Algeria, and Turkey dropped duties. This also indirectly speaks of the existing interest in wheat, especially low-protein.

According to SP Global Platts, the spread between Russian wheat with 12.5% protein and Ukrainian wheat with 11.5% protein on a FOB basis of deep-sea ports is at the minimum level. Market participants note that with feed wheat, which is in short supply, the spread is also minimal.

SUPPLY Australian wheat is heading towards March price levels. Crop prospects remain very optimistic and are valued by the market at 28-30MMT. According to Singaporean traders, all offers of new crop Australian wheat have already been fully contracted, with shipment in December, when harvest starts. According to various sources, from 1.5 to 2.5 MMT have been contracted, of which 1 MMT - to Asian countries, primarily to China. China has been buying Australian wheat in the past few months at a price of $ 235-240 / t C&F, although by mid-November the price had climbed to about $ 265 / t C&F. Nevertheless, it is competitive compared to Russian wheat of similar quality, which was offered at that time at a price of $ 270 / t C&F. Recall that China threatened to "look" more closely at Australian wheat, and Australia, in turn, signed a trade agreement with Indonesia in May, including preferential terms for the supply of 0.5 MMT of grain. The latter was an important sales market for Ukraine and Russia, but if the supply is still limited, then Australia can return this market to itself.

Due to the revaluation of the potential wheat production in Argentina to 16.8MMT, local analysts expect that exports will be limited to 10.2MMT. In the graph from the BCR report, projected exports are highlighted in red, confirmed sales - 3.8MMT in green, and 5MMT export purchases in yellow. At the same time, the unofficial rate of the Argentine peso to the dollar in the second half of October has already exceeded 193, while the official remains at 77.8 pesos per dollar. Local experts estimate FOB December shipments at $ 260, including an export duty of 12%. Minus handling costs and duties, the local wheat price for the farmer would then be $ 228 per tonne. In the event that exporters do not fulfill their supply obligations, wheat will be sold on the domestic market, where consumption is at the level of 6.5 MMT per year.

Sowing in Ukraine, despite the rains, still lags behind previous years. According to a preliminary survey of farmers, the Ministry is building a balance of the future harvest based on a decrease in sown areas by 10% compared to last year. Some market participants believe that this season's price rally and the onset of rains will allow more winter wheat to be sown than expected. But this will require a higher than predicted temperature in November. In the US, planting is ahead of last year, but the market expected a faster planting rate. The precipitation that fell over the past weeks has improved the situation with moisture reserves. According to the Hydrometeorological Center, as of the beginning of the second decade of October, 60-65% of the areas in Ukraine have sufficient moisture for the beginning of the autumn growing season of winter grain crops. In an interview with APK Inform agency, the head of the agrometeorology department of the Ukrhydrometeocenter T. Adamenko indicated that there are areas where waterlogging was recorded due to two or three monthly precipitation rates that cannot complete the sowing season. However, drought persists in the eastern region of Ukraine. Against the background of the rapid growth of prices in ports, it is possible that producers will change their intentions and the reduction in area will not be so significant. Sowing in the United States and Russia continues rapidly despite drought, which has supported prices due to fears of declining back-to-back crop production. But the rains of the second half of October improved the situation both in the Black Sea region and in the United States, so the risks have already partially won back. With regard to the rate of export of this season's harvest, Russia has sold more than 16 MMT, and the rhetoric about the introduction of quotas from the new year remains. Ukraine has shipped more than 10MMT, and according to market participants, another 3-4MMT have been sold before the new year, and the export limit is set at 17.5MMT. As the price rises, demand falls and the rate of export is lagging behind last year, but the available crop is getting smaller.

DEMAND To regulate local prices and reduce the burden on TMOs, the Turkish government has zeroed taxes on imports of wheat, barley and corn until at least December 31, 2020. According to market participants, the port facilities in Turkey are almost full, and traders are in no hurry to sell the volumes purchased earlier, expecting further price increases. China, despite rising stocks at the start of the season, may boost wheat imports, primarily due to lower production, Cofeed said. Sudan is working to acquire 1MMT wheat with US support. Algeria prefers Baltic or Polish origins. Syria also declares that the monthly demand for imported wheat is 200kMT. Egypt will not charge sellers of imported wheat sifting and fumigation fees if dead insects are found in their shipments, Reuters reported. Along with the relaxation of quality requirements by Algeria, this demonstrates the shortage of grain in the domestic market.

According to Reuters, France will supply China with another 2MMT of wheat. The European Commission last week again did not publish data on exports, but most likely in the next report they will eliminate the lag in the actual figures of wheat sold.

Since the beginning of the 20/21 marketing year, the supply of US wheat to China amounted to 1.2 MMT, in contrast to the same period last season, when US wheat was not exported to China. The EU also updated data on exports, the gap from last year is no longer 47%, but 30%. Taking into account the fact that the harvest is 25% lower, these figures no longer seem so frightening, but speak of the use of the export potential. Poland and the Baltics are the most actively exported. Ethiopia is also quite active in the market.

Pakistan's official wheat stocks are rapidly depleting and the private sector is re-evaluating the commercial viability of imports at the current high global market price. Russia, after a five-year hiatus, is increasing the supply of wheat to Pakistan, follows from the monitoring of the analytical center Rusagrotrans. Recall that at the end of June, Pakistan allowed the private sector to import duty-free 2.5 million tons of wheat to cover the deficit, which formed against the background of a decrease in gross harvest last year by more than 1 MMT. Reduced inventories and decreased production caused prices to rise in the domestic market. Neighboring India, where wheat surplus has formed, cannot meet demand due to political divisions.

The rally, which began with the announcement of quarantine in the spring, was reinforced by drought and cutbacks in production, in the summer it received a short break under the pressure of the harvesting company, but gained momentum again under the influence of the same factors. The market is overheated and is at many summer highs. Importers' appetites are "not rubber", even though the supply is limited. It's time to take a short break and relax. Perhaps the market will agree with me.

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