What to watch: The US trade war with China will continue to dominate markets, with more import tariffs on the way.
US wheat and corn crops look promising, but weather concerns dominate markets in other major producers.
Further cuts for EU wheat are to be expected in Germany and across northern Europe after weeks of dryness and higher than average temperatures.
And the oilseed markets are being driven by a game of political chess.
Nov 18 LIFFE wheat futures closed on Wednesday, July 11, at £165.75/tonne, a drop of £3.50/t on the week.
UK markets seem to be suffering from confusion and indigestion. The impact that the current weather is having on the wheat, barley and OSR crops remains the main question.
Predicting how crops have been affected by the recent hot weather isn’t easy but we need to remember what is hot for the UK is a normal summer for many wheat growing countries.
Early barley samples show a largely dry crop – below 13 per cent and with bushel weights varying from the low 70s to mid 60s – there is obviously the odd very poor sample, but again this happens every year and growers and traders alike will also have to judge yields with caution. The dryness of the crop needs to be taken into account when comparing with previous years.
The indigestion in the market is being caused by farmers still offering up old crop grain, against consumers who have not actively bought into the recent price rally. This issue has been exasperated by the thoughts of an early wheat harvest compared to the delays anticipated back in April.
On the plus side, demand for grains continues in the animal feed sector in light of less grass, but this demand is being diluted by a general lack of action from the UK ethanol sector.
After settling at its highest since early July 2017 at 189.75€/tonne [~£168/t], December-18 Matif wheat embarked for what could be a short-lived correction due to harvest pressure, a rebound in the euro and the ongoing risks associated with the US-China trade war.
Fundamentals are at least supportive, not to say bullish for EU wheat, with further cuts to be expected in Germany and across Northern Europe after weeks of persistent dryness coupled with well above normal temperatures. Overall, the EU soft wheat production is set to post a 4-5 per cent yearly decline with the CRM Agri forecast standing at 135.3 million tonnes for soft wheat (141.8mt last year) and 144mt (151.1mt last year) for all wheat production.
In France, the wheat harvest is progressing rapidly and said to be of good quality, while the size of the crop varies greatly between 33mt to 36+mt. The French Ministry stated that the 2018 wheat production should fall only marginally from last year and it would still be about 1 per cent above the five-year average, with average yield seen at 7.30t/ha vs 7.36t/ha last year.
In Germany, losses could be even more severe, with the country’s Farming Association expecting a 15 per cent drop compared to 2017 to only 20.5mt – 13 per cent protein German wheat FOB trades at its highest level since July 2015.
A similar trend is observed in the Black Sea with Russian wheat FOB prices about $10-$15/t above last year’s prices. The worrisome spring crop conditions continues to underpin the market.
After last week’s rally in prices US wheat has turned weaker this week, losing some value in reaction to President Trump’s announcement that another $200 billion of Chinese import tariffs will be imposed.
The US winter wheat harvest was put at 63 per cent complete in this week’s crop report - that is up from an average of 61 per cent at this time. Spring wheat crops are looking promising, with 81 per cent heading versus 69 per cent as an annual average.
In addition, ratings went up 3 per cent on last week to 80 per cent good to excellent, versus only 35 per cent last year. Corn conditions are also very promising after enjoying a decent run of weather.
There have been some showers in Australia over the last week to 10 days. However, much of the country missed out on any real rain, meaning that soil moistures are still in decline.
Their weather models show a return of dryness and the increasing likelihood of an El Nino event developing. This could lead to a hot and dry summer to follow the very dry drilling period they have already had. Current crop estimates sit around 20 million tonnes but could dip below this if a dry summer is realised.
China is also looking at production drops, with a wheat estimate of 122.5mt published. This is sharply lower than the last USDA number of 129mt and, if realised, this would be the smallest wheat crop since 2013.
Following the sharp decline in soybean values last week, the US, as expected, imposed $34 billion of tariffs on Chinese imports last Friday, only for Beijing to reciprocate immediately.
Friday then saw a session of ‘sell the rumour, buy the fact’ price action, as markets bounced into the weekend. However, as markets then tried to calm, Trump’s announcement that another $200bn of Chinese import tariffs are to be imposed has sent the markets back into sell mode.
Not helping the cause for soybeans is the current weather forecast showing favourable weather for the Midwest and the likelihood that US production will be increased in tomorrow’s USDA report, as both area and yield are likely to be amended higher.
MATIF rapeseed ended little changed, despite France’s agriculture ministry putting the rapeseed crop at 4.6mt, down almost 15 per cent year-on-year, mainly due to lower yields following winter frosts and heavy spring rains. However, Canadian canola prices slipped as a reaction to lower Chicago bean prices.
Markets seem almost impossible to trade, as current political events overshadow market fundamentals. USDA will provide some market sentiment tomorrow, although traders believe the markets will still be vulnerable to further bouts of political chess.
The final trade outcome is still very unclear, which will encourage traders to remain cautious.