Grain and oilseed markets are watching Brazilian weather patterns
In the UK, prices are supported by continued Brexit uncertainty and tight supply and demand.
Increased crop numbers in Australia takes some of the steam out of market values globally.
Oilseeds prices have retreated this week.
Nov-21 LIFFE wheat futures closed on Wednesday, December 2 at £158.15/tonne, a fall of £1.45/t on the week.
Last week saw UK wheat prices follow global markets on the up-side fuelled particularly by US wheat sales to China. However, they resisted falling at the same rate when funds and speculators started to liquidate their positions.
The resistance to follow global markets lower is due to the tight UK supply figures for UK wheat.
Brexit negotiations continue to cause sterling fluctuations but the market is generally underpinned by tight supply and demand.
Barley prices remain at a significant discount to wheat; up to £45/t under feed wheat in some areas of the country. However, if we remember that the 2020 barley crop was the largest since 1988, anything over £140/t is good value in isolation.
Exporters have been busy and need to be, as domestic compounders have maxed out their barley inclusion in the ration. It is estimated that one million tonnes will need to be exported from the end of November.
On Friday, the AHDB released its ‘Early Bird Survey’, indicating initial planting estimates for 2021 harvest.
Understandably the wheat area bounced back, remarkably to an area almost identical to the 2019 harvest (1.815m hectares versus 1.816m/ha in 2019).
Spring barley is expected to see a 30% reduction given the winter wheat increase, and the decline in oilseed rape continues - 18% down year on year at 318,000 hectares.
Global grain markets have had an interesting week.
The Australian Bureau of Agricultural and Resource Economics (ABAREs) published a wheat crop of 31.165 million tonnes versus 15.165mt last year and a barley crop of 11.96mt versus 9.001mt for 2019/20. Both above United States Department of Agriculture (USDA) numbers.
This tonnage certainly changes the marketing and logistic dynamics in Australia and has taken some of the steam out of market values globally.
On the other side, concern is still being mentioned around the dryness in the Black Sea/Russia and the Southern Annular Mode (SAM) – which ultimately is likely to affect the view on the size of the current season's carryout requirements and trade for 2021/22.
The political uncertainty and continued issues with Covid-19 globally have also prompted more questions around demand. This has not helped the US dollar, which is currently at a 2.5 year low.
The question still is how much more upside US corn may have. Having reached recent highs, it has taken a breather but demand prospects remain positive and supply due to SAM still remains uncertain.
The rain prospects for central Brazil will keep every market jumpy over the coming months.
As we get towards the end of 2020, Australian production remains one of the final unknowns for global wheat supply this year, creating competition for European exporters on global markets.
Following multiple drought years, winter crop production in Australia was boosted by very favourable seasonal conditions during spring and summer.
ABARES estimated Australian wheat production to have increased by 106% to 31.2mt, the second highest on record. Barley production is forecast to increase by 33% to 12mt, the second highest on record.
The larger wheat crops will create additional competition with Black Sea wheat, especially into Asian markets into Q1 and Q2 of 2021. While large barley crops will create additional competition with Black Sea and European barley exports into North Africa, a market that will be of significant importance for the UK with a large barley surplus remaining.
However, we are now approaching the point in the season where domestic and global market prices are looking to harvest 2021.
The UK wheat area is expected to rebound. France is also expected to have a rebound in wheat area, with planting having neared 100% complete. Russia too has planted a record area of winter grains.
While it is early in the season and too early to estimate yields, Europe and the Black Sea are certainly currently on track to have an increased surplus next season, with the UK in a potential marginal net export position.
Global oilseeds prices retreated last week, the only exception being KL palm oil. US soybeans, meal and oil, alongside Matif rapeseed all dropped between 2-3%.
The world oilseeds market has rightly been focused on weather conditions in South America (largely Brazil) for the last few weeks, with a view that soybean plantings there are delayed, soil conditions have been overly dry and their crop potential is in decline.
On the demand front, Chinese appetite for soybeans is ongoing and robust (100mt/per annum – 8.3mt per week). Essentially, the world balance sheet cannot cope with a supply-side shock so prices have been trending sharply upwards.
With the global picture painted, why did the price decline last week? A few reasons:
1. Commodities of all flavours are out of fashion within the financial community, for now.
2. Rains hit the right places in Brazil’s major growing areas.
3. Global energy prices (crude) fell by 1-2%.
4. Profit-taking by the managed money ahead and after the US Thanksgiving holiday period.
In the global context though, the fundamentals remain largely unchanged. China still needs to import 8.3mt soybeans each week. The US is the only place on earth that can supply this demand until March, when Brazil’s soybean crop is harvested.
Forecasts for US soybean stocks have been halved in just three months and any delays to Brazil’s harvest, which is already baked into the cake due to delayed plantings, will place more pressure on the US.