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Key factors to watch in the global grain market

12 December 201914 min reading

In a few weeks, we will skip the equator of 2019 which has seen a high level of volatility in agricultural commodities from trade wars, ASF, LatAm currency falling, and some another stuff. Now is a good time to look ahead because all these factors will continue to be key for commodity prices. Strong US dollar and weak peso and real already making LatAm grains more attractive. Sustainable increasing in Black Sea production will push the market as well. Also, new Argentinian government could set a package of export duties.

Elena Faige Neroba Business Development Manager, Maxigrain

An ASF epidemic has culled about 55% of China’s hog herd in the last 12 months, as it spread through large swathes of Asia, creating a global pork and animal protein deficit, Rabobank says. Major animal protein-exporting regions – including Europe, Brazil, and the US – have risen to the challenge of bridging the supply gap. However, their efforts have not been enough to prevent global feed consumption growth slowing to 1.5% in 2019, down from 2% last year. In 2020, China’s feed consumption is expected to rebound slightly, amid a concerted move toward large industrial farms, commercial feed rations, slowing herd losses, and growth in other animal proteins. Rabobank expects China’s soybean imports will recover fully, back to the pre-trade war record of 94mmt, by 2020/21, assuming hog inventory recovery shows some progress in 2020. But for me, it’s too optimistic, ASF still somewhere there.

China Hog Prices back above $300/cwt US Equiv. Another year of record US hog slaughter is expected in 2020, driven by modest improvements in productivity and herd growth. US pork shipments to China could be record-large (up 16% YOY) in 2020, as the full impact of ASF is recognized by the market. But LatAm and EU producers also expected to increase supply to cover China’s appetite. An outbreak of ASF in an export region outside of the US, e.g. Europe or Brazil, could drive higher export demand to the US – and with it, higher prices. Feed costs are expected to remain moderate and have a limited impact on production.

The US-China trade relationship since the beginning to nowadays has seen several changes to market sentiment as a result of geopolitics. “Phase 1 agreement” still not signed and idea that China will buy increasing quantities of US agricultural products – including soy, feed grains, cotton, and animal protein – in the hope that the US will delay the introduction of new tariffs, while possibly also lowering some existing ones. China announced on Friday the 6th of December that it would exempt US soybeans and pork from tariffs. The customs tariff commission of the State Council said in a brief statement that some purchases of US soybeans and pork by Chinese enterprises would not be hit by tariffs that were imposed as a countermeasure in the trade war with the US. The US is set to impose 15 percent tariffs on US$160 billion of Chinese imports on December 15. At a press conference in Beijing on Thursday, the Ministry of Commerce spokesman Gao Feng again said that if the two sides agreed on an interim trade deal, “tariffs should be reduced accordingly”.

WHEAT In the northern hemisphere, spring wheat harvest wraps up in the US and Canada under mixed conditions. Winter wheat conditions remain generally favorable except for a few areas. But expectations are not such optimistic: planting areas decreased. The USA has the lowest winter wheat areas in the last 100 year, Europe is not in time on rains, Ukraine too dry and also cut planting numbers. Just Russia now looks good. In the southern hemisphere, mixed conditions remain in Australia and Argentina – both of them also decreased production as per unfavorable weather. In the EU, the sowing of winter wheat started under mixed conditions due to variable climate conditions. In Ukraine, winter wheat conditions have improved as very warm and too dry weather in October - November is facilitating crop development despite some areas of low soil moisture. In Russia, conditions are favorable for winter wheat entering dormancy with only spot areas of dryness in the south. In Kazakhstan, winter wheat conditions are favorable as the crop enters dormancy? But this year could be a good example of how summer can change expectations. Winter wheat is under mixed conditions going into winter due to the late sowing caused by the delayed harvest of spring crops.

In Australia, below-average rainfall and above-average temperatures in early spring, particularly in Western Australia and southern New South Wales, have significantly reduced yields. In Argentina, the harvest is wrapping up in the northern region under generally favorable conditions. Firstly, Australia is seeing a third consecutive year of drought, and we expect the lowest crop there in over a decade. Secondly, dry conditions are also challenging the 2019/20 Argentine crop, and a change in government will likely result in export challenges in years to come. Wheat prices have taken a lot of volatility from shakier corn and soybean prices during much of 2019. And while much of 1H was dominated by increasing expectations surrounding global wheat production, the reality turned out to be slightly disappointing.

While the EU showed a recovery from last year’s drought, and yields in the US were impressive, productivity in Russia – the largest exporter – came in below early-season expectations. Overall, all main importers bought a lot since the beginning of the marketing year and prices a ready for rally. Despite these issues, all in all, global wheat production showed a good recovery in 2019/20. Global stocks are expected to grow by a modest amount but still lead to record levels in 2019/20. Stocks-to-use will increase by less than 1% on a global level and remain flat in the world outside of China. This is partly due to a very good global demand, with the highest growth rate in three years. The largest demand changes will come from the EU, where there was a 13mmt YOY production increase, Rabobank reported. However, feed demand also increased by 5mmt, and exports are expected to go up by 4mmt, largely driven by France. Also, France expected to increase exports up to 19%, mainly to Egypt and Turkey, but Algeria and Tunisia are not active enough. Global import demand is forecast at strong levels, in part because low prices are encouraging stocking at the destination, and also because wheat is clawing back share in global feed – ground it had lost to corn last season. Wheat prices are expected to remain supported during the coming months. Harvest pressure from the Black Sea and the EU has been overcome, Ukraine pushed wheat into the exports their record 28 MMT crop at a rocket-high pace: up to 70% of exports capacity sold out for today. However, record global stock levels are expected by the end of 2019/20, and any price increase will be capped as long as the global corn market doesn’t also bring serious price excitement to wheat. Given record ending stock levels in the 2019/20 season, any price upside is likely to be limited. Russia, in particular, could see a large recovery in production, with exports that will challenge global wheat price levels. Also, we can only expect normalization in the weather in Australia through 2020, but it’s not so true. Global grain supplies will impact pricing on wheat. If the US plants more corn, and if South America and Ukraine continue their corn production growth, wheat will lose share in global grain demand – and wheat exporters will feel the competition in price. This will also negatively impact the paper market wheat prices. Furthermore, we cannot discard a depreciation in emerging- market currencies, leading to very competitive offers from Argentina, Russia, and Ukraine, with some key wheat buyers running down stocks.

CORN In the US, the harvest is still ongoing in the northerly regions of the country, with an expected decrease in production from those states due to both a reduction in harvested area and yields. In Canada, the harvest is wrapping up under variable conditions due to a lack of heat during the season and a late start, particularly in Ontario, the main producing province. More than 1 mln bu still not harvested and covered by the first snow. In India, the sowing of Rabi corn is beginning under favorable conditions. In the EU, rainfall is hampering harvest in France and Germany in an already mixed condition season due to summer heatwaves. Rain makes harvesting delay. Over the last year, two disparate US corn narratives have competed for dominance. The first, championed by record-short speculators in April, expected US plantings to heavily favor corn over tariff-bruised soybeans; it further argued that US corn exports were in terminal decline and in need of an ethanol or trade deal. As is often the case, objective truth was to be somewhere between the two extreme positions. US farmers attempted to plant the highest- ever corn acreage, but were stymied by flooded fields. US corn took a hit from the elements, but moderate supply issues were largely offset by falling export demand, courtesy of record harvests and weak currencies in LatAm. A clear example was last year’s record corn harvests and exports by heavyweights Brazil, Argentina, and Ukraine that have helped offset supply issues in the US. To be honest, I’m proud of my Ukrainian corn production forecast come true: production numbers are near 34-35. For next year, however, ongoing localized dryness in Brazil and Argentina presents salient risks for corn plantings and – combined with potential ethanol, tax, and feed increases – will reduce the export potential to the benefit of the US. The main fundamental factor which will drive market is ethanol production spatially in the USA and Brazil. Another one – in covering China’s meat demand.

The corn in Argentina is rated 2.0% poor, 44.6% fair, 47.1% good, and 6.3% excellent. The corn rating this week is slightly better than last week. The soil moisture for the corn is rated 10.2% short to very short and 34.5% optimum to surplus, which is also a slight improvement compared to last week. The corn is 72% in vegetative development and 7% pollinating. The Agriculture and Livestock Federation of Santa Catarina (Faesc) indicated that livestock producers in the state will face corn shortages and higher prices in 2020. The president of Faesc attributes the corn shortage to very tight available supplies, strong domestic demand for corn, surging exports, and a weaker Brazilian currency.

Brazilian corn exports in 2019 could set a new record of 41 million tons due to a weaker Brazilian currency, which is currently trading at about 4.2 reals per dollar. The strong domestic demand is coming from two sources, livestock producers and ethanol producers. Meat exports continue to increase mainly due to the strong demand for animal protein from China. In fact, live cattle prices are a record high in Brazil and in some cases, 50% higher than at the start of 2019. The demand for corn for ethanol production is expected to be as high as 5 million tons in 2020.

SOYBEANS The diminutive soybean has become an unlikely symbol of a US-China trade conflict that has firmly raised geopolitics above fundamentals as the primary determinant for CBOT price direction. But firstly soybeans were overproduced and at the same time China cut protein needs – these are the main factors. But everyone likes to talk-on-talk, so let it be. Soybeans are the second-largest US export good to China by value, in an otherwise disproportionate trade relationship balanced in China’s favor. For US farmers, this annual trade (20mmt-28mmt) has historically represented a rare source of security as other China-bound F&A products declined into an increasingly competitive global trade landscape. It left one-third of supplies earmarked for China stranded, bloated US and world stocks to records, and further disillusioned the fragile US ag economy about China’s promise. China’s punitive tariff measures on US soybeans did not spare its importers, who paid higher prices to South American suppliers unable to wholly satisfy Chinese soybean demand. Importantly, China’s soybean deficit was cushioned by a critical internal issue hidden amid the trade turbulence – namely, a growing ASF epidemic that decimated its hog population and curtailed feed demand. The result in 2018/19 was the first decline in Chinese soybean imports in 16 years, from 94mmt to 83mmt. Looking to the year ahead, trade optimism will provide an unstable foothold for soy prices to climb further, while any geopolitical deterioration should be cushioned by improving supply-side fundamentals. 2019/20 global production is seen down 6.3%, cutting global stocks-to-use from a record 32% to 26%. In the US, conversely, farmers will respond to higher Chinees demand.

Southern Buenos Aires and southern La Pampa received some rainfall last week, which helped relieve some of the dryness, but it did not fully recharge the soil moisture. The core production region of central Argentina continues to receive the most rainfall and the moisture situation in central Argentina remains favorable. There were also rains in northern Argentina, which should set the stage for soybean planting starting this month. The forecast is calling for dryer than normal conditions for the next 10 days at least which will result in increased moisture stress, especially in the southern and western areas. The bottom line is that the weather in Argentina continues to be very uneven and not what it should be for this time of the year.

The soybeans in Argentina are 39% planted, which is 1.7% slower than last year. This represents an advance of 7.7% for the week. The most advanced soybean planting is in the core production areas where the crop is 60-65% planted. In southern Argentina, the soybeans are 15-30% planted and soybean planting has not yet started in far northern Argentina. The soybeans are in vegetative development and the crop is rated 34% fair, 62% good, and 3% excellent. The soil moisture for the soybeans is rated 14.8% short to very short and 31.4% optimum to surplus. Last week, both the Buenos Aires Grain Exchange and the Argentine Government increased their soybean planted acreage by 100,000 hectares due to the assumption that farmers may switch some of their intended corn to soybeans. The switch is occurring because farmers are concerned that the new administration, which will assume power on December 10th, will increase export taxes and potentially interfere in the corn export market.

The Brazilian weather continues to improve, but it is still uneven with pockets of dryness in parts of south-central Brazil and in northeastern Brazil. The weather has improved enough in Brazil to go from a neutral to lower bias to just a neutral bias. Late planted soybeans in Brazil can still have acceptable yields as long as the weather during the remainder of the growing season cooperates. The biggest impact of late-planted soybeans will be on the safrinha corn crop. The 2019/20 Brazilian soybean crop is approximately 88-90% planted compared to 93% last year and 85% average. The soybean planting is essentially complete in Mato Grosso and Parana. The remaining areas to plant are in northeastern Brazil and far southern Brazil. A significant percentage of the soybeans in the state are double-cropped after wheat and the wheat harvest in the state is now nearly complete. Even though planting has been somewhat delayed in the state, farmers are still expecting good soybean yields.

Domestic soybean prices in Brazil continue to strengthen due to the weaker Brazilian currency and tight available supplies. The new crop harvest should start in early January in western Mato Grosso where some of the first soybeans were planted.

So let’s just watching how it will be and then say ‘I told you so!’

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