What to watch: Russian and Ukrainian wheat development will be a significant watch-point over the next few weeks
UK wheat rises before crashing back down.
The EU grain rally has also paused for now.
And planting conditions in the US have continued to dominate global headlines.
Nov-19 LIFFE wheat futures closed on Wednesday, June 5, at £152.15, a fall of £3.35/t on the week.
UK wheat prices rose rapidly in the first half of the last week, before crashing back down again in the last couple of sessions.
The LIFFE Nov 19 wheat contract closed at £157 per tonne last Friday, the highest settlement since January 16 and some £16/t above the lows set mid-May.
However, nothing moves in a straight line and on Tuesday and Wednesday heavy selling across offshore markets pressured domestic values lower, erasing all but a couple of pounds' worth of the week’s gains.
Currency movements have been a supportive price element over the week; the pound losing further ground against the euro, while the euro has lost ground against the dollar. These twin moves have helped domestic new crop rapeseed prices maintain an upwards trend.
The price spread between UK and continental wheat prices has deteriorated, with LIFFE wheat (Nov19), compared to MATIF (Dec19) widening out to nearly £10/t. While this calculation is not perfect, it does suggest the market is starting to discount any ideas of a UK crop problem.
Defra’s latest supply and demand wheat balance sheet, published Wednesday, includes a revised production number some 400,000t lower than previously estimated.
To make the balance sheet ‘balance’, officials have had to slash animal feed demand, boost imports and cut exports.
With official trade and usage data up until the end of March to analyse, that seems a bit premature.
In the wake of record US planting delays, new crop Euronext wheat rallied 8 per cent in May, its best performance for the month since 2011.
However prices are now consolidating, down about 4 per cent or €7.50/t from last Wednesday amid improving conditions in Western Europe where crops have benefited from the rain seen in May, although some dry spots persist in parts of the UK and France.
However, the 20 million tonnes yearly increase in EU wheat production will likely limit any long lasting rally in price and EU farmers have made the most of last week’s five-month high reached on Euronext wheat.
In the Black Sea, following a benign winter and good spring conditions, the Ukrainian crop is full of promise with a record crop in the offing while some quality risks now exist.
In Russia, the southern and Volga regions remain too dry and too hot for producing record wheat yield and, as such, analysts have now started cutting their optimistic 82+mt wheat crop estimate against 77mt for the USDA.
Even if the Russian wheat crop is lowered over the next three to four weeks, we cannot talk about a disaster and fierce export competition will once again be evident in the months to come with about a third of the world wheat exports set to come from the former Soviet Union in 2019/2020 compared to just 15 per cent for the EU and 13 per cent for the US.
Disastrous planting conditions in the US continue to hamper progress. As of Monday, the reports were of 69 per cent planted compared to the 96 per cent average.
It is difficult to quantify total crop losses until the final drilling dates and these vary in each state, however, there is talk of 3.2m hectares of Prevented Planting insurance already claimed.
Elsewhere, the market is turning a blind eye to the large volumes of corn in South America and the Black Sea priced at huge discounts to that in the US. This will satisfy any demand in the short-term but, eventually, the US will have to compete.
US winter wheat ratings are up 3 per cent to 64 per cent good-to-excellent, versus just 37 per cent last year.
There are talks in the market of a record US crop, despite the widespread rainfall of late. Meanwhile, Russian/Ukrainian wheat development will be a significant watch-point over the next few weeks as the crops reach maturity.
Russia’s harvest begins late June/early July and the recent hot and dry weather could impact crops. On Monday, Russian agriculture consultancy, SovEkon reduced its estimate for Russian wheat output from 83.4mt to 82.6mt. This is still towards the top end of estimates.
The recent rally in US wheat and corn helped pull soya off its recent end May lows but, with a small correction in both in the last few days, soya values have also taken a direct hit. The uncertainty remains – do US farmers muddle in more corn if the opportunity presents or do they now plant nothing or even wall to wall soya?
Funds remain short of the CBOT soya contract having squared off both corn and wheat. European OSR balance sheets are coming under a lot of scrutiny – was the area really planted, did it survive the various attacks by flea beetle, and will it ever set a good pod?
All questions which currently have few answers and, with a storm system currently heading across large areas of France and Northern Europe, this will just add to the concerns. Europe may need to import more OSR to meet standard needs this year but how quickly more soya will be bought as a cheaper, better replacement will also be interesting.
With crude oil prices relatively low, biofuels are starting to look like an expensive blend again and something to watch in the coming months. As always, June will add uncertainty to the markets, but all eyes will be on US soya planting expectations along with South American shipping logistics.