Maneuvering in the Dark

06 June 20216 min reading

“Wheat markets will continue to be anything but boring. A seasoned wheat consumer should not be fooled by ample supplies, and should procure cover on the breaks and if and when long-awaited harvest pressure materializes ahead of projected record demand.”

Natalja Skuratovic Senior Manager Sales CIS PETKUS Technologie

Let’s get straight to the point: the ratio of all EU grains stocks to use is presently at the lowest level in 40 years. New crop carryover also looks tight. And yet, there are persistent rumors about French new crop wheat sales to China. Similarly, USDA posted initial new crop corn stock to use ratio in May, which is lowest in 10 years, and that for beans the lowest ever. Naturally, any imbalance between supply and demand leads to overheated markets with both traders and consumers are nervous as a cat in a room full of rocking chairs. The wheat values have gone up steeply this year, have come down significantly and currently find solid support in high corn prices refusing to drop further on forecasted ample supplies.

Due to anticipated strong feed demand, potentially at an unprecedented level, including increased uptake in China, India, the EU and the USA, 2021/22 wheat consumption is projected to grow year to year. Nearly a quarter of all the feeds traded on global markets will be earmarked for China next year. Total US corn sales for 2021/22 season are already at nearly 11 MMT – an unprecedented level for this time of the year. Corn puts a solid floor under feed wheat values and Asian buyers maximize feed wheat purchases at current hefty corn values. Black Sea milling values compete on the other hand with the Australian wheat for consumer demand while Argentinean farmers are struggling to have their wheat planted in the current persistently dry conditions.

With the amount of grain being bought by China - both current supply and commitments - global commodities are seemingly set to be extremely high for a while. Animal feeding sector is bound to experience significant rise in feed costs for the next couple of years. There is a one million dollar question hanging over the market: what happens if the American wheat, corn and soybean crops come in with less than expected yield this year given that they are increasingly at risk on both quality and quantity?

Recent forecasts for near-record high prices have already assumed record yields for US corn and soybeans. So what happens if US crops do not meet the USDA's expectations? Well, then we may expect to see new all-time highs for those crops.

At the same time we will also likely see more countries try to cushion the blow of high global food prices. They can achieve this by either restricting food exports by imposing export levies or quotas, or by reducing import tariffs and/or by subsidizing food prices. Some of these steps have already been taken. Others are yet to see the light of day. None of these interventions in the market by various overzealous governments will solve anything. They will only aggravate the situation and effectively push the prices even further.

In the past decades consumers worldwide have grown accustomed to get a substantial cover by buying cheap ex harvest Black Sea wheat. This year, however, trading in new crop Black Sea wheat is lacking both enthusiasm and direction. Recently introduced Russian floating tax on grain exports which enters into force in the first week of June, has effectively made it impossible to calculate the tax on forward grain deals. After this proverbial kiss of death new crop sales of Russian grain have been practically dormant. Rumor has it, that exporters will be able to fix the tax by paying in in advance. However, this does not shed any light on how Russian exports will shape up in the first quarter of the season.

Nominal Ukrainian new crop 11.5 pro values are around $250, which is up 25% from a year ago. Baltic 12.5 pro wheat is aggressively priced to sell at $250 at about $10 per ton discount as compared to nominal Russian values.

Supported by strong demand for dry bulk carriers, on top of recovering bunker prices, ocean freight costs across all main grains and oilseeds origins rose steeply during the past twelve month. IGC Grains & Oilseeds Freight Index (GOFI) increased sharply to 183.6 points in mid-May 2021 as compared to 72 a year ago, led by Southern hemisphere exporters, most notably Australia. Currently freight rates from the deep-water ports of the Black Sea are very high, and grain traders must pay up for freights amid falling grain prices. A lineup of vessels has built up with over 600 KMT of Russian wheat under loading in anticipation of the decrease of the Russian export tax (from 50 Euros to 28 USD) and this does not help to bring freight rates down. In view of the above, lower FOB wheat prices do not immediately translate in cheaper CIF prices for consumer at destination. Consequently, the consumers are put off by the absence of lower offers given the obvious drop in FOB levels and are not in a hurry to extend coverage.

The projection for global wheat consumption is well supported by projected growth for food and feed, including in China (see above IGC graph for Wheat: World feed use).

With such a solid floor underpinning the prices, one cannot argue that grain markets are dull. They change constantly and lead market players to continuously rethink scenarios and to choose workable strategies, which are adapted to the environment. For the next two months or so we will be navigating in the weather markets looking for direction in the murky waters of uncertainty over the pricing and marketing of Russian wheat. At the moment there is not much of a Russian export program for July-September whereas farmers, in Russia and elsewhere, are getting ready to sell wheat. The game of push and pull between the farmers and the consumers will determine the prices in the short run.

Wheat markets will continue to be anything but boring. A seasoned wheat consumer should not be fooled by ample supplies, and should procure cover on the breaks and if and when long-awaited harvest pressure materializes ahead of projected record demand.

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