Friday 30 September 2016

Bumper global harvest means that markets will remain flat into 2016

Global wheat production is set to hit a record 731m tonnes in 2015

John Bergin

Published 23/09/2015 | 02:30

Wheat harvest
Wheat harvest

On the back if three successful global grain harvests that have resulted in high stocks everywhere, we are in a period of low feed grain prices. It means that we are in a market looking for demand rather than supply.

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The last three years have seen excellent production in regions such as Europe, the former Soviet Union and Brazil. Combined with the plateauing of ethanol demand and slowdown of economic growth in places such as China, the feed grain market is not a happy place for sellers at the moment. Corn (maize) has become the dominant feed grain, displacing wheat in many animal feed diets.

The 2015 wheat harvest is almost complete globally and yields have been excellent and in general the wheat crop has been harvested in very good condition.

This month's USDA report that outlines global supply and demand only served to confirm this, with another increase in its projections so that global production is set to clock another record of 731m tonnes.

As a result of three excellent crop years wheat stocks have grown to a record 227m tonnes. The key point is that the wheat is being produced in key exporting regions across the world, so it will all be looking for an export home (see graphs below). It is also worth noting the dominance of the former Soviet Union (which includes Russia and 14 former USSR states on it's western and southwestern borders) in world wheat as this region will produce over 113m tonnes again this year.

So what has this done to prices? As we would expect prices are in a downward spiral with current prices on Matif around €169/t. It's a far cry from the €205/t we traded at in late June when there were concerns about flooding in the US and hot temperatures in Europe. While harvest pressure is easing and spot prices have lifted a little, some of the forward price contracts in the market have also been eroded.

I feel it will be a flat market for the next few months, and wheat needs to try to displace alternatives such as maize, by pricing itself aggressively enough to be included in diets. As a result, this could be the first season for some time that wheat actually trades at prices lower than corn.

This bearish stance by the market towards wheat is the same this time last year, but the market did rally from October through to January last year on the back of big bet by shippers against the farmer - in other words, big traders presumed that farmers would have accepted the lower prices rather than holding on to the grain. The opposite turned out to be the case.

I just don't think the market will take the same position this year, and I expect farmers to do the same again and sell as little as possible at current prices.

Another factor is the big investment funds. It's possible that they have gone 'short' -ie- they have only bought enough grain for the short-term in the hope that the price falls further.

This can back-fire, especially if there is some kind of weather warning in the interim, but I don't see this as being very likely, with most of the weather issues played out for this year.

Looking forward to next season's plantings, I see very little to suggest that planting will be back in the key growing areas. This is driven by the fact that this year's harvest was completed early in the key regions and yields were excellent, all of which encourages farmers to go back in and plant.

A very significant factor is that in many of these regions the local currency is quite weak relative to the US dollar, ensuring that the farmer is getting good prices.

John Bergin is a grains trader at R&H Hall

2015 will be third largest corn harvest

CORN has been the price setter for feed grains globally for the past few years. This year's corn crop of 985m tonnes is set to be the third largest crop on record, even if it is 25m tonnes smaller than last year. Corn will also be vying for buyers with wheat, so excellent wheat yields and quality will force corn prices to trade at competitive levels to ensure market share.

The corn harvest is only about to start globally and the early yields from the US have been better than anticipated.

The biggest reduction in corn production this year is in Europe with production forecast at 58m tonnes, compared to 2014's 74m tonnes.

Corn exports have increased dramatically in the former Soviet Union countries since 2010 when they were just 5m tonnes. Last year they hit a record 25m tonnes. The big growth in corn production globally has been driven by the high prices on the back of corn's use in ethanol.

Ethanol production has plateaued, and corn prices have come back, but the price drop has failed to curb the growth in corn production.

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