What to watch: With both Canadian and Australian canola too expensive to import into northern Europe, despite the EU needing to import, either Commonwealth markets will have to fall or European prices rise
In the UK, new crop conditions are being driven by the assumption supply and demand will remain similar to 2017/18.
The latest WASDE report showed tightening supply and demand balance sheets.
European markets continue to be frustrated by weather with concerns lead various analysts dropping EU wheat crop numbers by 1.7-2.1 million tonnes (mt) year-on-year.
Nov 18 LIFFE wheat futures closed on Wednesday, June 13, at £160.51/tonne, a fall of £0.35/t on the week.
The old crop UK wheat market has developed into a June market, where there are more sellers than buyers, and a July market where the reverse is true.
It currently seems as if the June sellers will have to accept July delivery, and we shall all find out during July what the real UK supply and demand is.
New crop market conditions are currently driven by the assumption that UK supply and demand will be similar to 2017/18 with the UK remaining, for the third consecutive season, as a net wheat importer.
Exports should feature only as an occasional sideshow, unless yields are spectacularly above trend, and delivered premiums over futures are already trading at significantly higher levels than prior to harvest 2017.
Imported feed wheat pricing into northern England and Scotland are already setting a benchmark for our market’s upside potential, but feed wheat imports on any scale from Denmark, which has been a significant source of wheat for the UK this season, are unlikely given their reduced crop area and current drought affected crop condition.
World events will, as ever, play a part in setting our prices, but it is hard to see a bearish surprise driving UK prices significantly lower at present.
European markets continue to be frustrated by weather. The concerns have led to various analysts dropping EU wheat crop numbers by 1.7-2.1mt year on year, yet there seems little interest in the approximate 2.2-4.16mt increase in the barley crop number over the same time period. As with every year it will all come down to location and quality.
With Spain still lined up to combine a combined crop of main cereals which could be around 5mt larger than last year and the Baltic regions looking like they may be 4-5mt less, the focus is likely to return to Central and Black Sea EU countries to supply exports internally and to III countries.
The price of commodities will remain unclear until some clarity is reached on crop sizes in other areas of the globe.
The wheat/corn spread in the US remains wide so any issue in the main US corn growing states in the coming weeks could upset prices within the EU. Consumers will have to decide what they can and will consume during the coming season and depending how flexible they can be will dictate values be this between corn, wheat or barley or the various oilseeds available.
The further uncertainty over rising oil values and how this could affect demand for biofuels along with the price of imports will also continue to overhang traders views.
The USDA reminded the world on Tuesday (June 12) what has been feared for months and awaited for several years by producers: tightening supply and demand balance sheets.
In its latest WASDE report, the US agency pegged the combined wheat and coarse grain ending stocks to 447.73mt, of which, 266mt of wheat and 155mt of corn/maize, or more than 45mt lower than in 2017/18.
For wheat, the 266mt global ending stocks do not sound too worrisome but digging further, the stock-to-use ratio of the top eight exporting countries could be the lowest since the 2007/08 campaign with lurking risks in Australia.
Consequently, it was not a surprise to see a sharp rally in global prices when the USDA cut its 2018/19 Russia wheat production forecast by 3.5mt to 68.5mt from a month ago - the last time the USDA had been so aggressive was in 2007/08.
For maize, the US crop, which is off to a very good start, will have to perform this summer to keep world stocks afloat, with an expected steep 38mt (or around 20 per cent) fall in 2018/19 according to the USDA. The downside risk for wheat prices remains limited for now.
US soybean and bean meal futures shed nearly 5 per cent each last week as good growing conditions encouraged funds to liquidate some of their long positions.
In its recent monthly report, the USDA left its projected US soybean yield unchanged, at 88.2bu/acre, slightly lower than last year. This, despite recent favourable conditions that has allowed sowings to reach 93 per cent completed (90 per cent five-year average).
In South America, Brazilian hauliers are holding the country to ransom, with blockades at the ports slowing deliveries of soybeans. The Argentinian soybean harvest is about 93 per cent completed (88 per cent five-year average) with yields forecast some 28 per cent lower than normal.
Canola futures in Canada followed declines in the soybean market, but despite this, Canadian canola remains $33/tonne too expensive to export into northern Europe. Australian canola is even more expensive, at $61/t above continental rapeseed supplies.
With the EU needing to import up to 4mt rapeseed this season, either these Commonwealth markets will need to fall, or European rapeseed prices will have to rise over time. We back the latter scenario.
On the continent, overly dry and hot conditions east of Germany have negatively impacted on rapeseed yields. Despite this, Euronext rapeseed futures slipped by 1.2 per cent last week.