What to watch: Time will tell which of the conflicting views on the impact of recent wet weather has had in Brazil are corrects
The North/South divide continues in the UK with strong demand in the North attracting supplies from the South
Globally, wheat prices were being driven higher due to weather concerns in the US winter wheat belt
In Europe, it seemed likely EU export projection was too high and that EU closing inventories will increase further
Northern tightness and the easy south
The significant divergence in price levels between the north and south continues. Very strong demand for grains north of the river Humber is attracting supplies from locations further and further south, where supplies are more readily available.
Cash basis levels reflect this anomaly, with Yorkshire feed spot wheat values trading some £6-£8 above nearby LIFFE futures. Further south and east UK basis levels are trading between £0 and £-5. Meanwhile, farmers continue to hold back supplies.
According to official Corn Returns data the volume of wheat sold up to 25th January was 20 per cent less than at the same period last season and 14 per cent less for barley.
Judging by the robust pace of wheat imports during November (154Kt), UK wheat prices had been trading at import parity levels beforehand. Since the LIFFE / MATIF wheat futures spread has narrowed further since Christmas, to only a pound or two discount, we could be due for another large importing month in December.
As evidenced by the strong basis levels, the balance sheet needs it. Furthermore, the spread between new crop LIFFE/Euronext is also on the rise as the market begins to anticipate another very tight wheat balance sheet in 2018/19. Currently the spread is valued at around £8/t.
Lack of export interest overhangs European wheat markets
After continuing the bearish slant into the new year, which accumulated into a series of consecutive daily lows, the markets have bounced, supported by a dryness concern-based rally in Chicago.
Early monthly pressure, caused by the euro hitting a multi-year high against the US dollar, eased slightly over the past few sessions after Donald Trump’s vision for a strong currency provided limited support for the greenback.
Although trading at contract lows, the market has done little to prompt export interest. Logistics pressure has seen cash levels rise, at a time when Algeria purchased in excess of 500,000t, and a Saudi boat was nominated to be supplied from France.
Current levels place French wheat almost $20/t above Black Sea supplies, on a comparable spec. With a similar premium over Argentinian wheat, it remains unclear how the recent Algerian trade will be split between the various origins.
Despite a rise in Black Sea values, due to rising oil prices supporting the rouble, Russian wheat is still cheap into international markets. There are only a few large international tenders to complete the marketing year, and the recent rise has effectively killed off any prospect of a major shift in EU shipments.
It seems likely that the EU export projection is too high and that EU closing inventories will increase further.
US conditions drive prices higher
Global wheat prices are moving higher, sparked by a short covering rally as US funds get nervous about dry conditions across the US winter wheat belt. Parts of the Plains have not had any rain to speak of since October.
The USDA released crop ratings this week showing deteriorating conditions. The key winter wheat producing state of Kansas was reported at 44 per cent poor to very poor in comparison to 20 per cent last month.
This is the highest poor rating ever recorded for the state and the good to excellent rating was down from 37 per cent to only 14 per cent. Other states also saw concerning ratings; for example Oklahoma was rated 4 per cent good to excellent versus last month’s 15 per cent and Nebraska at 48 per cent versus a previous 64 per cent.
Topsoil moistures are still declining but it is difficult to gauge how this will affect yield at this time of year – moisture will be more critical in the spring when crops break winter dormancy and resume growth.
However, US plantings were already at a 100-year low so any potential production issues will make wheat markets nervous. This is being demonstrated this week, as US funds move to reduce the large short positions they have been running.
Focus on weather in South America
Oilseed markets are very focused on South American weather. Conflicting views on the impact that recent wet weather has had in Brazil range from bigger yields to frustrated harvest probably resulting in lower crop numbers.
As with all issues of the climatic type only time will tell. In the US farmers will be starting to look at gross margin returns between soya and corn for the coming planting season. The calculations should fall in favour of more soya and less corn but with corn yields being so good for so many years it may explain why we still don’t see a major swing.
In Europe the debate over trade rules and subsidies on biodiesel imports or unsustainable use of palm oil in the sector keeps everyone guessing. Will the EU be flooded with imports or can barriers to trade be erected again? Topics which need addressing but just as important is the long term demand for diesel in a world that is moving towards electric and hybrid cars.
Rapeseed markets remain under pressure as shipments continue to head to the EU from Australia and the soya / rape spread fluctuates mainly through currency moves. At times like this knowledge of local markets is important and the impact of adequate supply shouldn’t be underestimated.