“Drought-hit crops of the European Union and Australia are getting smaller from month to month and now expected by the USDA at 7-yr low for the EU of 137.5 MMT and 12-yr low for Australia of 20 MMT. In spite of lower y/y wheat yield in Ukraine & Russia, this countries are still expected by USDA to harvest impressive crops – Ukraine – 5th largest 25.5 MMT, Russia – 3rd highest on record 71 MMT. #1 rival of Black Sea wheat in 2018/19 is US crop, although its presence on the market is traditionally expected to increase after December, when Black Sea supply should be already depleted. Things happen so fast, that season is looking like action movie, keeping investors staying focused.”
There’s an old wisdom that big crops get bigger and small crops get smaller. It seems that this season market analysts were competing who will cut more tonnes from drought-disqualified Australian and the EU crops. Russian crop performance, fluctuated by USDA ups and downs, was entertaining CBOT & confusing already puzzled market. Now it became complicated as authorities have found alternative method to pacify Russian wheat export, or like in Argentina, to earn more money for budget from introduction of grain export duties. #1 rival of Black Sea wheat in 2018/19 is US crop, although its presence on the market is traditionally expected to increase after December, when BS supply should be already depleted. Things happen so fast, that season is looking like action movie, keeping investors staying focused.
Wheat: “The Magnificent Seven” world suppliers deal with 6-yr lowest crop, but aimed to export maximum on attractive prices
All market players has already felt that wheat prices are hottest for the past 5 years, balance is tight, although there remains feeling that everything is not so bad. USDA is still showing that TOP-7 world wheat suppliers are expected to export only about 1 MMT y/y less wheat in 2018/19. How come? Like in all fairy tales, scraping the corners [of last year stockpiles] and tightening belts of local consumption, as times came to benefit from finally nice prices, spurred also by growing Asian and African demand.
“Heroes of the season”, which brought prices on fire
Drought-hit crops of the EU and Australia are getting smaller from month to month and now expected by the USDA at 7-yr low for the EU of 137.5 MMT and 12-yr low for Australia of 20 MMT. Farmers are largely superstitious and prefer to count crop, when it is already in the bins. As for the Southern Hemisphere, analysts were shouting about record-expected Western Australia crop, believed to keep Australian export at 14 MMT, which is indeed very close to last year’s 14.5 MMT. And here we go, “Don’t cross the bridge till you come to it”, widespread frost has dented this hopes, and now Australian crop could be further downgraded to below 19 MMT (INTL FCStone 18.77 MMT, ABARES 19.1 MMT USDA 20 MMT, IGC 20.5 MMT), with export seen by local operators at around 10-11 MMT. As for the EU wheat crop, in spite of smaller size, its quality of crop is reported to be good, thus it will fully cover its milling industry, but will need to import more to for feed sector… spurring demand for Ukrainian feed wheat.
Black Sea & America rubbed their hands, but …“Don’t cross the bridge till you come to it”
In spite of lower y/y wheat yield in Ukraine & Russia, this countries are still expected by USDA to harvest impressive crops – Ukraine – 5th largest 25.5 MMT, Russia – 3rd highest on record 71 MMT. Even if this figures will not work, the lower benchmark for Ukrainian wheat crop is official AgMin’s forecast of 24.2 MMT in clean weight vs. 26.16 MMT LY, but more likely to be close to 25 MMT (FCStone 24.6 MMT, Agritel 24.72 MMT, APK-Inform 24.8 MMT). So far, in Ukraine, the situation is more calm vs. Russia, as it has more confidence in the future. Ukrainian AgMin confirmed the expectations of wheat export from the country in 2018/19 at 16 MMT, just like it was signed in Aug 10 memorandum, with the ratio between milling wheat to feed wheat at 8 MMT/8 MMT. In spite of other analysts estimating that milling wheat share is below 45% or even equals to 40% this year vs. 55% LY, in Septemder AgMin reconfirmed that it is 60%:40%, just same as last year. Herewith, Ukrainian grain market became concerned about possible changes in the sphere of phytosanitary control (changes in the procedure of accepting and registering applications for issuing permits in the field of plant quarantine in the Mykolayiv region, so far suspended until October 17, 2018).
Key world, describing Russian market recently is “uncertainty”. Uncertainty about the volume of the crop, keeping under question the exportable supply. Thus, experienced market participants with knowledge how government could intervene, were farcifying export, attracting attentions of an “all-seeing eye”. At the end of August, Russia was whispering about possible export curbs once grain exports reach 30 MMT, incl. 25 MMT of wheat, in 2018/19. This export volume was expected to reach by the end December 2018, giving clearer incentive for investors. Then, in September, Russian AgMin forecast 2018/19 grain exports at 35-37 MMT, IF the grain harvest exceeds August expectations of 105 MMT (vs. record 135.4 MMT last year), incl. 30 MMT of wheat”. The irony is that previously Russian AgMin forecast 100 MMT grain crop and 40-45 MMT grain export. Then in mid-September, authorities were talked to implement unofficial ways to decrease exports in form of stricter quality controls by watchdog Rosselkhoznadzor. Herewith, even if Siberia and the Urals fail to harvest wheat in time due to rains or snow, and the total of Russian wheat crop will be lowered from current USDA’s 71 MMT to 67-69 MMT, expected by most analysts (IKAR 69.6 MMT, FCStone 69.3 MMT, SovEcon 69 MMT, Agritel 67.40 MMT, IGC 67 MMT, AgMin 64.4 MMT), it will still remain the 3rd largest crop, after last year’s TOP-crop of 85.8 MMT wheat. Thus, seemingly, Black Sea countries are in a beneficial position. Most market participants believe Russia would export about 10 MMT less wheat y/y in 2018/19, which is in line with Agritel’s expectations, as “spring wheat yields in the country are better than expected, but the cost of transporting them to Black Sea ports is high and should not allow Russia to significantly exceed 30-32 MMT of wheat exports”.
Another country poised to benefit is/was Argentina with its record expected by USDA crop of 19.5 MMT and export forecast at a record 14.2 MMT. But now local analysts are talking about lack of moisture in the critical period of plants development, thus, prominent future is already clouded. Plus, local exporters are not happy with government’s decision to earn money for budget implying export tax of 4 pesos per dollar (about 10%) on wheat and corn, and could delay sales, expected to come in the market in December-January. Moreover, authorities are considering to increase this duty to 33%.
Moving to the Northern Hemisphere, Canada should also have quite a good from historical point of view crop of 31.5 MMT, expected by USDA, or at least 29-30 MMT, forecast by two different surveys by local Statistics Canada’s. Such a growing market as China, which traditionally buys high protein Canadian and Australian wheat, could also attract Russian and Kazakh batches. The U.S., which is still #1 Russian wheat competitor by volume, seen by USDA to produce the 2nd lowest in last 12 years wheat crop of 51 MMT, although it is 4 MMT more y/y. US exporters are expected to benefit traditionally after Dec-Jan, when BS supplies will tighten.
QUALITY ISSUES TO AFFECT EXPORT ROUTES
Drought-caused early start of wheat harvesting pressed wheat prices, but it was a “silence before the storm”, as tightening balance and farmers’ readiness to sit on bins caused prices hike. After previous season with its huge Russian crop, importers were unprepared for such development and stayed away from purchases, as well as strating playing in “unproper quality” game in order to discount prices for wheat batches from the BS. Here we talk about Fusarium (banned for Indonesia, Egypt, Thailand, Japan), Tilletia (banned for Indonesia, Egypt, Thailand, Japan, Israel and Syria) and Alternaria (should be absent for Malaysia and Syria) fungus contamination, as well as sprouted grains, although its volume appeared not critical. Market as well hopes, that Egypt will stuck to 0.05% ergot contamination.
Meanwhile, Russian exports, which are always under the threat of possible limitations of export, are not ready for such risks and this could push for lower supplies to growing Asian market. Average protein content in Ukrainian wheat this season is 11.9%, in Russian 12.27% (-0.3% y/y), as per SGS interview for APK-Inform agency. As well, SGS underlined, that Russian wheat quality, in general, is at the level of European wheat and even better than American soft varieties.
CURRENCY TROUBLES PUSH IMPORTERS TO FOCUS ON LOCAL SUPPLY
Local currency depreciation lead to delay of Turkish importers coming into the market. After focusing on local crop, forecast by USDA at 19 MMT, - 2 MMT y/y (meanwhile local consultancy Sunseedman is more pessimistic at 17-18 MMT) and info in early August about selling by TMO of 2 MMT of wheat from reserves, largely presented with local wheat, at a subsidized cost, local millers were knocked-off by government’s decision announced on Sep 05 to export flour only from imported wheat. Thus they can’t benefit anymore from TMO’s reserve sales. On Aug 14, Turkey has allocated duty-free quotas for 750 KMT of wheat for TMO with a deadline on May 31, 2019. Previously, the duty was 45% for wheat. Only after month passed, lack of supplies pushed TMO for emergent tendering for 252 KMT of wheat and readiness to sign deal even in rubles. As Turkey imports wheat mostly for flour production, Russian origin is expected to dominate here.
Corn market seems to be the most exposed to bearish mood on expected by the USDA 2nd highest on record crop of 376.62 MMT in the U.S. and record 31 MMT in Ukraine. Herewith, farmers prefer to sit on stocks and wait for better prices. As well, tough competition is expected from Romania and Serbia. In addition, later in the year, Céleres forecast Brazil to produce over 100 MMT of corn in 2018/19 for the first time in history (30.29 MMT 1st + 73.82 MMT 2nd). In September, RGE cut forecast of Argentinean corn production 2018/19 to still record 43 MMT, down from a record 45-46 MMT expected previously. Argentine farmers, which have already started corn planting (Aug – Jan), reacted fast introduction of 4 pesos per dollar export tax. Indeed, this tariff is likely to provide support for Ukrainian corn exports from Oct. Trade conflicts should provide additional demand for Ukrainian corn, here we talk about China and EU, which imposed 25% import tariffs for US origin corn. On the other way, there is also enough space for US origin, for example growing demand of price-sensitive South Korea by 4% y/y to 10.2 MMT, which is mostly focused on US PNW corn.
Barley market so far evolves more confidently compared to wheat and corn, as world end-stocks are seen by the USDA at 35-year low of about 18 MMT. EU & Australian crops are forecast at 57.65 MMT & 7.8 MMT, -2% and -12% y/y respectively. As well, Ukrainian harvest is expected at 7.6 MMT (even closer to 7 MMT by local analysts), -12% y/y. So far, USDA expects Turkey to import only 100 KMT of barley in 2018/19, herewith, as on Aug 14, 2018, Turkey has allocated duty-free quotas for TMO for 700 KMT of barley with a deadline on May 31, 2019 (previously import tax rate for barley was 35%). TMO came in the market for 246 KMT of barley for Oct 09-30 loading. Thus, USDA’s Turkish figures has some base for upward movement in October balances. From the other side, previous expectations of higher demand for barley from China is fading, as country’s pork industry under threat of swine fever. While Saudi Arabia trying to decrease imports, switching to less expensive alternatives. As of September 19, 2018, Ukraine exported 1.82 MMT of barley which is 42% of export projections for 2018/19. Tight balances got tighter…