MARKETS OUTLOOK Grain prices bounce as surplus starts to shrink

by John Buckley

“Traders are still debating how far this year’s Russian wheat crop will decline after a dry start, a higher risk of frost damage and difficulty financing spring sowings. A 10-15m tonne fall would probably encourage the government to keep some sort of controls on exports, probably an extension of this season’s ‘temporary’ duty”

72 | Milling and Grain

Grain prices have steadied in recent weeks after their long drop amid further signs that 2015/16 supplies will be ‘less loose’ than this season’s - if not exactly ‘tight’ by historical comparison. Several factors support this view. In the wheat market, analysts are looking for a decline in this year’s Russian, Ukrainian and European crops, possibly the USA’s too (less sown, more winterkill, droughts etc). As we go to press the trade is also getting excited about a possible major flood loss for India’s crop (the world’s second largest wheat producer and consumer). How much may wheat production decline? The UN Food & Agriculture Organisation recently suggested the next crop could still get to 720m tonnes – just 7m short of last year’s record. That might seem a bit optimistic given all the above factors (more detail on those below). The International Grains Council meanwhile offered a preliminary assessment of 709m (it remains more conservative on last year’s too at 719m) while the Canadian Wheat has just come out with the lowest estimate of just 703.4m (versus last year’s 724.8m). But does the world actually need another 720m tonnes-plus harvest? Probably not. Last year’s consumption, after all, was estimated at less than 715m, resulting in a 10m tonne stock buildup that will help cushion the impact of a smaller 2015 crop. Until recently, that 2014/15 surplus had been weighing heavily on prices which hit five year lows last autumn and recently seemed to be heading back in that direction again. Can we expect another season of consumption growth pacing last year’s 10m tonnes – (mainly in animal feeds)? The IGC projects a mere 3m tonnes increase in next season’s total wheat consumption at 711m which would reduce ending stocks by just 2m tonnes (from this year’s 198m. It’s possible if maize competition in feeds recedes a little (again, see below) and wheat prices are competitive enough. If not, then wheat markets may be more or less in balance or need only a modest stock drawdown. None of this is the stuff that bull markets are made of. While the direction winter wheat output is taking is becoming a bit easier to pin down now, most of the key spring wheat crops had yet to be sown as we went to press. Agriculture Canada recently estimated a similar area to last year’s for its own spring wheat crop (the bulk of its annual wheat harvest) while the country’s Wheat Board sees the total crop down from 29.3m to 28.7m tonnes. The EU is also expected to so somewhat less than last year. Russia and Ukraine, whose winter wheat crops appeared to be floundering from the word go, would normally be expected to make up expected any losses to these with more spring sown crops. But, as detailed in our earlier reviews, both are under considerable financing restraints from their weak currencies (expensive input) and credit difficulties (including soaring interest rates). So how low might this year’s Russian wheat crop go? The government has recently reiterated its view that the total grain crop can make 100m tonnes (versus last year’s 105.3m), maybe a couple of million more as some winter crops came through in better shape than expected earlier. That, western observers say, would imply wheat around 55m tonnes. However, not everyone agrees, give that the country’s ag ministry recently estimated winter losses of almost 17% of the crop – while acknowledging that 9% of what did come through was in poor shape. Consultant Sovecon suggests the grain total (including spring planted crops) could be in a range of 85m to 92m tonnes, with wheat contributing somewhere between 47m and 53m. Even lower forecasts have been aired (75-78m grain total) although these are ‘worst case scenarios’ that are probably too pessimistic now. Meanwhile, due to their recent export controls, both Russia and Ukraine will have larger wheat stocks