MARKETS OUTLOOK Rock bottom prices as supply grows
by John Buckley
"World maize production estimates have dropped recently to take account of lower EU, US and Chinese numbers. Since July, the all-important US crop (37% of world exports) was first raised from 343.7m to 347.6m tonnes, then reduced again to 345.1m (16m under last year’s record harvest. This figure is still contested as many analysts think USDA is over-rating planted/harvested acreage, possibly yields too if some slightly disappointing early-harvest results prove typical"
IT has been a mostly bearish period since our last review – thanks to some new record crop and stocks estimates for wheat and soyabeans and the chill economic wind blowing from China. The latter especially has unsettled global market sentiment, casting a shadow over the forward outlook for commodity demand – especially in the feed and bio-fuel sectors (depressing crude oil prices to new lows). It also seems to have outweighed, for now at least, the likelihood that US and CIS – possibly also South American maize supply has been over-rated – although, even if it is, there is probably still more than enough of the leading feed grain to meet all perceived demand, as discussed in more detail below. The overall impact of these events as we go to press has been to push prices to new five-year lows for US and EU wheat, 6½- year lows for soyabeans and to dampen ideas of a sustained recovery in the feed grain sector (maize prices have at least managed to stay above last September’s five-year lows but for how long?) While great news for consumers, the constant slide in raw material prices is generating unease in some countries about the potential impact on farmer incomes and future sowings. We have already seen declines in Canadian and Argentine wheat areas and Latin American maize sowings are tipped to fall too. For the time being, though, large stocks of all the main crop commodities will offer considerable protection for supply going forward, whether from grower cutbacks or anything less than severe, multiple bad weather events. In the latter respect we have to keep one eye on less promising weather in the CIS region – lack of rain for a Russian (2016) winter wheat crop that’s over halfway sown and Ukraine’s – which is about a quarter planted as we go to press. Anyone who has watched the markets in the last decade will know how easily production in this region can be devastated by droughts or severe winters – sometimes with seismic effect on prices (Russia, the world’s third largest wheat exporter, was arguably the key factor in a world shortfall that drove wheat markets to alltime record highs in early 2008 and contributed to several of the price ‘spikes’ seen since). Dry weather has also been a talking point in Australia and Canada while Argentina’s crop could be its smallest in decades after rain and floods exaggerated farmer planting cutbacks (although as well as low prices, farmers there have long tussled with government interference in export trade). There is also the ongoing presence of the El Nino climate phenomenon which can bring droughts to Australia and East Asia and too much rain to the Americas. If it really is the strongest for decades, markets might have to reintroduce some weather ‘risk premium’ into prices at some stage going into 2016. Also to be considered is the possible response of the managed funds to any hint of such weather issues reinvigorating crop futures markets. Commodities generally have been a poor investment in recent years of price collapse and, as mentioned above, may be facing a less than stellar year of consumption growth, especially if China’s wobbling economy spills weakness into Asia and other regional feed markets. That said, the ‘outside’ investor does seem to have a habit of turning a blind eye to such demand fundamentals when weather headlines get prices moving upwards so
66 | October 2015 - Milling and Grain