What to watch: ODA analyst Rupert Somerscales asks with the current global supply and demand situation, how long can global prices keep at these ’low’ levels?
The announcement of the Vivergo plant closure was ‘news of the week’ in the UK.
EU exports have been moving at a much slower pace than last season.
And the latest USDA report did not deliver, failing to recognise the full extent of the situation in Russia, Europe and elsewhere.
Nov 18 LIFFE wheat futures closed on Wednesday, September 12, at £175.5/tonne, a fall of £6.65/t on the week.
The news of the week was not from Russia for once, but the Humber, where Vivergo Fuels, the UK's largest consumer of wheat or meant to be, proposed to cease production at the end of the month, due to ‘challenging trading environment’.
The plant was built to consume up to one million tonnes of feed wheat, although recent years have shown EU wheat and maize proving popular, as they have been more competitive in conjunction with lower domestic supplies.
UK wheat fell suddenly to a seven-week low on the new before recovering rapidly towards its key 50-day moving average technical resistance of £178/tonne on the Nov-18 futures contract. Whether the closure is for good this time remains to be seen, but the robust animal feed usage will partially offset the lack of demand from the UK ethanol industry.
The 2018/19 UK wheat supply and demand balance is set to remain tight with a 4 per cent yearly decline in wheat stocks held in store by the trade as of the end of June. Unsurprisingly, only 15,000t of UK wheat was exported in July 2018; if confirmed it would be the second lowest level for the month, after 2014/15’s 12,000t, since at least 2000/01.
On the flip-side, July’s wheat imports reached more than 250,000t; the second highest in more than 20 years for the month and compared to 163,000t last year. On rapeseed, CRM Agri clients report emergence issues due to the persistent dryness and cabbage stem flea beetles now spreading across the UK.
EU exports have been moving at a much slower pace than last season, due to their lower production and aggressive pricing from Black Sea competitors.
Brussels’ weekly report shows the pace of EU exports lagging 41 per cent behind last year. Russia has been exporting at a fierce pace and, as of August 30, had shipped 9.6 million tonnes.
If this continues, Russia is expected to reach 25mt in a few months and this is the level at which export restrictions have been rumoured. Previously, the Russian Agricultural Minister had said there would not be any. However, some comments from the Deputy Prime Minister this week seemed to hint that restrictions could actually still be on the cards once Russia exports its surplus.
Domestic wheat prices that drive the cost of bread and feed to the livestock sector will be a key driver, but it seems as though the ‘will they, won’t they’ speculation could well continue through to Christmas, unless a firm statement is made.
News that Russian Government officials have started to slow down phytosanitary certificates to exporters, rather than simply ban or heavily tax exports, was a welcome development to markets, in that the Russian Government is awake to the concerns of the broader market and wishes for little trade disruption going forwards.
Since the tight supply and demand outlook for this region is pretty clear to all but the USDA, it seems Russia is awake to the capitalistic philosophy that consumers need to be treated well to encourage repeat business.
There is no point Russia banning exports and pushing wheat prices $50 higher over a quiet weekend. After all, how do you think Egypt, Russia’s biggest export market, would think about that price jump? Badly, one assumes.
So, we are in September; traditionally the over-supply northern hemisphere period where grain supplies are abundant.
And yet, the USDA fails to fully recognise the extent of the crop production problem in Europe (also Canada and Australia), Russia is trying its best to rein-in its exporters, which are pushing grains out of the export channels as quickly as they can before some restrictions are imposed, half of Australia is in a drought, there are sub-optimal planting conditions across pretty much the whole of continental Europe (August anomaly from mean), the global wheat stocks/use ratio is below 16 per cent (excluding China and India) and the world supply and demand fundamentals for both barley and maize (corn) signal higher prices ahead. How long can global prices keep at these 'low' levels?
Oilseed markets waited in expectation of the latest USDA report. The market was largely anticipating an overall bearish oilseeds report which is exactly what happened. The inter-commodity split is still meaning OSR markets are finding support in light of smaller crops globally, but the record US soybean yield/crop is being felt in most oilseed markets.
The uncertainty around Chinese demand in the face of trade issues remains an even bigger problem. The market wants to remain bearish, as demand levels are dropped by the USDA and Chinese authorities, but with yet another rumour of a new round of trade talks, it may be wise for consumers to consider booking early to save disappointment.
Closer to home, UK rapeseed markets remain relatively flat, with a large variance in crop numbers implying that imports and exports need to be very closely monitored along with usage data. This tight situation, coupled with the current concerns that many farmers are facing around flea beetle in newly planted crops, would imply we are unlikely to see much change in UK values in the short-term.