If you think that the current season will be similar to the previous one just because the price of grain continues to rise, I will disappoint you: you are wrong. But everything that happens is very similar to 2008 when macroeconomics affected all industries quickly and in detail. But let's start in order.
Elena Faige Neroba
Business Development Manager
We entered the beginning of the 20/21 season with the idea of a thaw in China-US relations and a wave of tensions between China and Australia. Optimism about the state of crops in the Northern Hemisphere melted before our eyes as the harvest approached, and the bulls found support in everything from quarantine to a drop in production. As early as late May 2020, wheat futures bounced off an eight-month low as concerns over the health of the European Union's harvest exacerbated the impact of worsening conditions in the Black Sea region. Rains were required in many regions to stem the decline in production.
Over a large area of the country and Central Europe, spring precipitation is insufficient to replenish the soil level. Daytime temperatures were also above average. Crop development slowed down significantly, and their condition was worse than in 2019. The forecast for relatively drier than average conditions in many parts of France, Germany and Poland - some of the main EU wheat producers - was stressful. A similar situation with a lack of rain was observed in Romania and Bulgaria.
In other words, the global wheat balance at that time became more dependent on the Southern Hemisphere. Winter crops in Australia and Argentina have become a problem. But looking ahead, it did not help - global inflation and the threat of disruption to supply chains pushed markets up. Corn was too expensive and needed more than the market expected. Wheat began to be used in feed. All the jokers were in the hands of the wheat producers. On top of that, freight began to rise.
The USDA has cut both acreage and potential yields. Prices continued to rise. Winter crops 20/21 in the Black Sea developed well. Siberia and neighboring agricultural regions of Kazakhstan. And it was not possible to restore the potential of winter wheat everywhere.
In August 2020, Brazil's wheat production could hit a record this season, while neighbor and main supplier Argentina struggles to maintain yielding potential as dry winters and lack of moisture in anticipation of soil weakened production forecasts.
Traders are counting on Australia to stem the downward trend in global wheat production in 2020/21. The huge potential of the Australian wheat crop has become a lever for lowering world prices for this grain.
The European harvest period made it clear that this year's production in the Union was mixed this year, as the growing season was dry for various producers and exporters. The resulting harvest is below average means grain exports from the EU will be much lower in the 2020/21 marketing year.
The steady flow of grain cargoes to China has been phenomenal as Beijing sought to rebuild strategic stocks ahead of a new 5-year cycle and responded to rising domestic demand driven by a stronger economy and the recovery in pigs following the African swine fever outbreak. This looks like a bumper crop for Canadian farmers in 2020. India looked good too. But the bulls cannot be stopped. At that moment, the global corn balance is rife with questions and uncertainties, and this will be a decisive factor in the development of international grain markets as autumn approaches in the Northern Hemisphere.
World wheat prices were rising, catching both traders and consumers by surprise. With a fairly large harvest in Russia, the market expected supply pressure to drive prices down. But the opposite has happened, as dry conditions in the Black Sea region made planting difficult, prompting local producers to tighten control over newly harvested grain. The winter cropping areas of Ukraine, Russia and Kazakhstan were very arid and of growing concern. Delaying sowing increases the risk of poor establishment of crops and difficulty getting through the winter.
Farmers around the world have become more informed and discerning sellers. They have government support and money to build grain elevators. They can keep the crop for a long time. We call this "sitting on the harvest." This negates the harvest pressure we are accustomed to. And the main consumers were waiting for the pressure of the harvest. Imports were lower than usual at this time of year and the unexpected rally caught buyers off guard. And everyone came to the market to meet their immediate needs.