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MARKETS OUTLOOK

Supplies just keep on growing

by John Buckley

Prices might have


stayed down or
dropped further still
if not for ongoing
concerns about the
proportion of higher
quality milling wheat
in this years mix.
Wet harvest weather
has lowered protein
content of US hard red
winter bread wheat
its main export grade.

CROP farmers anxiously watching prices fall to ever less remunerative levels have had further
unwelcome news over the past couple of months from yet higher cereal and oilseed crop
estimates across the Northern Hemisphere.
World wheat production has been raised from 731m to 745m tonnes and is now 10m over
even last years giant crop, according to the US Department of Agriculture. The move follows
combined increments to US, Russian, Ukrainian, Australian and Canadian production, far
outweighing a steep downward revision in the EUs prospects since mid-year (which may not be
the end of that story).
In a season of flat growth in world wheat trade the arena in which international value is
made even a prospective 8.7m tonne drop in Europes wheat export potential seems to be
getting swallowed up by the growing competition among its key rivals.
The USDA has also marked up consumption by 20m tonnes since mid-year, putting it some
27m over last years (gains mainly in the US, China and India). However, that fails to stop world
wheat surplus stocks rising from last years 241m to 249m tonnes their highest ever level.
The bellwether US wheat futures markets which started the season under the impression that
world output would decline this year - have responded by trading down to fresh 10-year lows,
shedding about 30% of its peak 2016 value at one point, before a partial bounce-back to a recent
23% net loss.
Prices might have stayed down or dropped further still if not for ongoing concerns about the
proportion of higher quality milling wheat in this years mix. Wet harvest weather has lowered
protein content of US hard red winter bread wheat its main export grade. Excessive rain is
also said to be causing some problems with vomitoxin and low proteins in Canada. French
wheat quality has been badly hit by the rains and floods that plagued its crop before and during
the harvest, affecting Hagberg falling numbers and other milling characteristics, if having less
dramatic impact on proteins, which should at least help disposal into feed outlets. German and
Baltic EU States have also encountered some problems with rain compromising harvest quality
while parts of Russia and Ukraine have seen similar weather problems. Russias crop is so large,
that its smaller proportion of milling wheat to feed may still exceed last years volume. Down
South, the Australian wheat crop, still a month or so away from harvest as we go to press, is said
to suffering some rain damage in New South Wales, its second most important exporting state.
This litany of crop problems is being reflected in larger than
usual premiums for better quality milling wheats over middling/
lower grades. Yet, such has been the descent in the market as a
whole, that even with that increment, some of the top wheats are
still trading at cheaper than usual levels.
In the USA, for example Dark Northern Spring wheat was

72 | October 2016 - Milling and Grain

offered export (fob) terms for nearby shipments from $264 down
to $247 per tonnes last month much the same as at this time last
year and far cheaper than in the autumn of 2014. But thats a full
$50 premium over better quality (12.5% protein) Hard Red Winter
wheat which is itself trading a massive $37 over ordinary HRWs
(compared with a $10 differential this time last year). The higher
volume of lower quality HRW is meanwhile putting it at a discount
to usually cheaper soft red winter wheat on fob export markets.
This wider than usual quality split and the ensuing price
differential is likely to result in far larger than usual supplies of
wheat offered to the feed sector in direct competition with maize
and other coarse grains in the US, in Europe and on the worlds
export markets especially in Asia, where buyers can be sensitive
to relative wheat/maize pricing.
In the months ahead, these three factors will be key drivers

of the wheat price: massive supplies overall, heavy export


competition and relatively tighter availability of higher quality
wheats. How all this will pan out in terms of average wheat
prices is uncertain. But for the time being, the quality premium
clearly looks likely to stick, if not expand further as buyers try to
get their hands on the best grade supplies first, keeping abundant
lower grade wheat prices under downward pressure.
Even more maize
IT has been a switchback year for the world maize market.
Prices initially rose quite sharply amid constantly sliding
estimates for a drought-reduced Brazilian crop the worlds
second largest export source after the USA. US markets were also
supported by talk of the La Nina weather phenomenon (the flip
side of last years El Nino) bringing a hot, dry damaging US

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Milling and Grain - October 2016 | 73

7-10-2016 12:53:06

year in food/industrial outlets. China will also boost demand


summer. Brazilian prices firmed further as its currency revived
from record lows against the US$ (in which most grain is traded) by 8.5m tonnes as it auctions off its massive reserves of maize
from past surplus crops. Some analysts think it might use far
but by then, it had oversold its short crop (cashing in on earlier
more than that as it offers new subsidies to its processors in an
currency weakness). With floods delaying the Argentine harvest
attempt to clear more of this surplus (which currently accounts
and Europe east and west more or less sold out after last years
poor EU/CIS harvests, that left the export floor clear for US corn for almost half the world stocks of maize). A number of smaller
demand increases are also expected in the EU (+2m) and in CIS,
suppliers to sell far more than they had earlier expected.
Asian and Latin American countries.
For a while, that export bonanza appeared to be propping up
Despite that, the maize market will remain in surplus, adding
the US market, and in turn global and European maize prices.
at least 10m tonnes to its already large global stockpile (forecast
However, in the past couple of months, mostly ideal US weather
219.5m tonnes). The lions share of that stock increase will take
has seen yield estimates start to rise and on top of an upward
place within the USA (+17m tonnes) leaving stocks there at
adjustment in the USDAs official planted acreage forecast, this
levels not seen for decades and equal to about 19% of usage or
has led to US production numbers rising from 366.5m to 383m,
almost 10 weeks supply.
versus last years 345.5m tonne crop.
As the sheer size of the coming US crop sunk in, CBOT
Over that same period, Brazils current (2015/16) crop forecast
futures prices embarked on a renewed slump, recently hitting
has been eroded by a further 3 tonnes, putting it 18m tonnes or
a seven year low of about $3/bu in
more than 20% down on the previous
August (about $118/tonne). As in the
years. But assuming a return to normal
Main wheat crop estimate changes since mid-year
wheat market these prices were almost
weather there compliments planned
(mn tonnes source USDA/Milling)
a third cheaper than their 2016 peaks
higher plantings, that should bounce
June
Sep
Last season
(around $173) before coming back to
back by an estimated 15.5m tonnes
EU
157.5
145.3
160
the $3.40s (about 22% down) in midnext spring. The EUs 2016 corn crop
Russia
64
72
61
September..
has meanwhile been cut by a further
USA
56.5
63.2
55.8
The decline in US wheat and maize
3m tonnes (and may have further to fall
prices
has inevitably reduced the value
as the main, French component still
Canada
28.5
30.5
27.6
of
grain
in Europe, although so far,
seems to be contracting). However,
Australia
25
27.5
24.5
not
to
the
same extent. Prices here
Argentinas 2016/17 crop has been
Ukraine
24
27
27.2
have
been
propped up by the shock of
revised up by 2.5m to 36.5m tonnes.
WORLD
731
745
735
the French and other crop shortfalls
Overall, world maize production is
and concerns about the downturn in
now expected to reach around 1,027m
Changes to world maize supply since mid-year
quality, by the weak euro and by ideas
tonnes a new record high, 15m tonnes
(mn tonnes source USDA/Milling)
that, even in a year of expected intense
over the mid-summer figure and a
June
Sep
Last season
competition from the CIS countries staggering 68m tonnes bigger than last
probably the US, Canada and Australia
years crop.
USA
366.5
383.4
345.5
too - the EU will be able to dispose of
As in the wheat market, big supplies
Brazil
82
82.5
67
enough of its exportable surpluses to
and low prices are expected to boost
avoid building further stocks (indeed
maize consumption which the USDA
EU
64.3
61.1
59.1
for both wheat and maize, EU ending
sees growing from about 959m to
Argentina
34
36.5
28
stocks should end 2016/17 quite a bit
1,016m tonnes. The lions share of that
Ukraine
26
26
23.3
below last seasons high levels).
usage gain is in the US itself, expected
Russia
14
13
13.1
While world barley output is seen
to consume an extra 11.4m tonnes in
WORLD
1,012
1,027
959
slightly lower this season, that
animal feeds another 2m more than last

74 | October 2016 - Milling and Grain

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76 | October 2016 - Milling and Grain

is more than offset by larger crops of sorghum, oats and rye,


indicating total coarse grain production of 1,320m tonnes about
72m more than last year. Along with the competition from cheap
feed wheat, this suggests the feed sector will have to remain
clearance-priced in the season ahead good news for livestock
producers input costs.
Proteins
The oilmeal sector has come under renewed pressure in the past
month from a record US soyabean crop, pushing down the cost
of beans on the bellwether Chicago futures market by about 20%
recently. In its August supply/demand forecasts, the US government
raised its yield forecast from 48.9 to a record 50.6 bu/acre (+5.4%
on the year) which in combination with its earlier raised estimate for
harvested acres, projects a crop of 114.3m tonnes. Thats 11m tonnes
more than expected mid-summer, easily covering earlier reductions
of about 6m tonnes made to weather-hit South American bean crops.
It means that, even with strong exports, the US remains in
soyabean surplus, expected to build carryover stocks to about 10m
tonnes over the coming season, compared with starting stocks of
5.3m and just 2.5m only two years ago.
Good supplies of soya are expected to continue well into 2016/17
as Brazil (just about to start planting) hopes for more normal weather
to deliver its first 100m tonne-plus crop next spring of 2017. Some
observers believe the Latin American soya expansion will slow down
from now on as farmers there switch land back to maize. Corn is
fetching much higher prices in Brazil after this years crop shortfall
and in Argentina, soya (unlike maize) still incurs a hefty export
tax. However, given normal sowing and growing weather, Lat-Am
soya production should still increase by about 3% for the year ahead
at least. In the US, the reverse equation weaker maize than soya
prices - is favouring even larger soya sowings next year, likely
to keep prices well under control (again given the usual caveat of
normal weather).
The bottom line is that soya will provide a larger share of world
total meal consumption in 2016/17 for the second year running
about 71% compared with 67% of recent previous years. Rapeseed
meal, which had previously seen strong growth of supply and
demand, has backtracked with two years of falling crops and
production but will be replaced this season with record large supplies
of sunflower meal up by about 10% from last year and as much as
27% higher than four years ago though still only providing about
5.5% of world total protein meal consumption.
Sunflower supplies are being boosted by bigger crops in Russia,
Ukraine, Argentina and in Europe itself. Sowings have gone up
in the former Soviet countries and in Latin America in response
to better returns from growing the crop, boosted by demand for
sunflower oil, the main crush product.
Rapeseed meal production has been reduced by smaller crops
in Europe and Ukraine to a four-year low although largest singlecountry producer Canada is at least expecting a big crop for a second
year running. Most of the decline in global rapeseed consumption
will be within Europe where it will be replaced by sunflower meal
and soya meal.
The big soya crop should also continue to keep down prices of the
other oilseed meals, most of which are less valuable than soya in
terms of protein content and other quality parameters.

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