In May, when old crops are practically “made”, we turn ourselves to the new crop for fresh ideas and trading direction. Let’s look at what the new season may bring for grain in general and for wheat in particular.
Senior Manager Sales CIS
This time of the year is referred to in many European countries as “cucumber time”. Back in the good old days, when cucumbers were in season, the gentry left town for the countryside and business was slow for tailors, shoemakers, upholsterers and the like. It is the time when news stories in the media tend to become of light and frivolous nature, the so-called “slow news season”. In May, when old crops are practically “made”, we turn ourselves to the new crop for fresh ideas and trading direction.
Let’s look at what the new season may bring for grain in general and for wheat in particular.
Presently, forecasts for 2020/21 campaign signal decline in wheat crop compared to the last year and, consequently, tighter S&D balances for all three world’s largest wheat exporters, namely Russia, the European Union and the United States, who together account for roughly half of world’s wheat exports.
Russia and the EU are currently entangled in an exciting neck-and-neck race this season and on track to export 33-34 million tons each. Time will show who will be the winner, but one thing is certain, it is not the time to rest on the laurels. World’s third largest wheat exporter, the United States, is not far behind with 2019/20 U.S. exports (including donations) forecast by USDA to total 26.8 million tonnes. In the meantime, Russia is working hard on expanding wheat exports to Algeria, which is traditionally an outlet for French wheat. Furthermore, Russia opened Saudi Arabian market, which up until now imported European, US, Australian and South American wheat. A symbolic 60,000 tonne cargo of Russian wheat was shipped to Saudi Arabia from the Black Sea port in the beginning of April. At the same time, French wheat is winning back its share in Egyptian imports.
Generally, tighter S&D and carryover stocks are a precursor of more nervous and volatile respective markets. This calls for educated choices in hedging strategies by concerned parties. Tightening of wheat balances in major wheat producing countries is closely monitored. In their latest report, USDA projects a 10% decline in the EU grain exports in 2020-2021. It is based on a sharp reduction in grain production in France due to “a very wet fall, and a long, mild and wet winter”, which hampered the plantings and raised disease concerns. However, if we take into consideration exceptionally dry and hot April conditions, and late March frost, we might feel inclined to trim these estimates further down. FranceAgriMer, a national establishment for agriculture under the authority of the French Ministry for Agriculture, estimates percentage of good to excellent wheat plantings to be 56% compared to 72% last year. This comes on top of 3-5% decrease in planted area from last year. Water reserves remain low and regular rains are needed over the next few weeks when the crops move into their peak water requirement growth period.
Similarly, in Germany situation is far from perfect after a mild winter had led to greater pest infestation in the fields according to German Farmers' Association (DBV). Subsequent lack of rainfall in March and April had dried up soils. The drought conditions were relieved for the time being thanks to rains in the beginning of May, but subsequent steady inland rains are needed.
Romanian AgMin said that their wheat crop has been hit hard by drought. Baltic States and Poland are also in serious need of regular rains in order to safeguard normal development of winter crops.
Taking into account correlation between rains in May and final yields, the farmers in the Balkans say, that every drop of rain in May is a golden coin into the pocket of the farmer. So great is the benefit of May showers for crop development!
In Russia new crop wheat crop forecasts now oscillate around 75-80 million tonnes (74 mmt ProZerno, 77 mmt Ikar 81 mmt Sovecon). The condition of new crop plantings in Centre Volga region in Russia is not bad, and a decent winter grain crop is expected. The south of Russia generally looks quite poor, and in some places, which were hit be the unfortunate combination of drought and frost (Krasnodar, Stavropol), new crop outlook is very bad. In addition, the rains came rather late.
Since time immemorial, grain in general and wheat in particular is most strategically important agricultural commodity and key dietary staple in both developed and emerging markets. In the times the COVID-19 pandemic, countries have relegated to food nationalism and protectionism in order to ensure current and future domestic needs. Thus, Romanian government introduced a ban on agri-food exports in the wake of the coronavirus. This measure was criticized by European Commission, and Romanian authorities reversed their decision some days later causing serious losses for the trade. In turn, the Russian government has approved agriculture ministry’s proposal to limit grain exports to 7 million tonnes from April through June amid the COVID-19 outbreak and introduced a quota, which was exhausted on 27 April. It was pre-booked, meaning that actual exports will take place in May/June, albeit at a slower pace than could have been the case, if the market was left to regulate itself without governmental intervention. The balance of wheat yet to be exported within the quota is about 2,8 million tonnes. After that, exports will be halted until July 1, 2020. The Russian government introduced this measure in order to ease the pressure for domestic consumers in the wake of the weakening rouble. The burden of economic losses has thus been effectively transferred onto the shoulders of the farmers, traders and port infrastructure operators. Russia as the world’s largest wheat exporter for the past three years. Hence it is under the magnifying glass of the media. No matter how small the effect of this measure turns out to be for the international markets, it forms a precedent which hurts free trade.
In the context of trade-distorting government protection mechanisms, like quotas and subsidies of all kinds, some unprofitable acres are inadvertently kept in production and operated at a loss. New and improved technology, in its turn, allows producers, who are farming on less favourable soil and in less conducive climate, to be competitive. However, at some point, when markets are left to balance themselves out at times of oversupply, they do so by pushing out highest cost producers and reducing the supply. Therefore, in current uncertain times, when national interests precede supranational ones, farmers may not be blinded by governmental quotas, subsidies and other temporary safety nets. They may not lose the actual cost of production out of sight, and avoid getting mired in debt. Otherwise, they should be prepared to clean the field for those who are more competitive and less burdened by debt, when the market mechanisms are reinstated.