What to watch: This week’s USDA report should give the market a fresh steer
Politics has come to the rescue of UK markets after MPs voted to hinder a no-deal Brexit.
The potential for large corn crops was weighing on European markets.
And European and Canadian rapeseed farmers were battling the elements.
Nov-19 LIFFE wheat futures closed on Wednesday, September 10, at £135/tonne, a rise of £0.75/t on the week.
UK grain markets have benefitted from Parliament’s vote last week to hinder a no-deal Brexit. From trading at a £22/t discount a week ago, the UK’s LIFFE wheat market currently sits at a £16/t discount to Euronext.
The rationale is that with a no-deal Brexit off the table (or far less likely) exporters would still have tariff-free access to the EU’s grain markets, without which buyers further afield in North Africa and possibly in Asia would be required to clear the sizeable UK wheat exports from our shores.
UK farmers are a few weeks away from starting their winter wheat drilling. So far, we are not anticipating any radical change in cropping patterns and, as such, we can expect a similar area sown to last year.
If yields perform to this year’s surprising level, we may again be facing another sizeable export programme through the 2020 season.
This would require UK prices to trade at a sizeable discount to EU competitors again, rather than at a premium, as we saw during certain periods last year when the UK was a net importer.
Domestic wheat markets are evolving daily as harvest logistics ease and notable shifts in the strength of sterling determines UK export competitiveness.
Most trade estimates project the 2019 exportable wheat surplus upwards of two million tonnes and the UK will have to continue exporting at pace in order to prevent large, problematic ending stocks.
The UK has been trading at a significant discount to French wheat for some time now and connected with large volumes of business into Iberia and beyond as a result.
It feels now though as if the tides are changing as European markets weigh up the potential impact of large impending corn crops. Already the EU has imported 2.2mt of Brazilian corn in July and August compared with just 300,000t a year ago - all adding weight to the overall feed-grain complex.
Ultimately, with US and EU corn futures sat near contract lows, continental wheat will have to discount itself to stay competitive and outmuscle cheaper corn, particularly as eastern Europe begins corn harvest in the next week.
This week’s USDA report will give the market fresh steer and will be particularly corn-focused. In the absence of any global weather events and favourable US corn growing conditions, it is unlikely the report will make any shock alterations to last month’s figures.
For wheat, there is a flag for widespread dryness in Australia and some estimates are putting the crop below 19mt. It is therefore likely we will see a downward revision from last month’s 21mt figure.
After scoring fresh control lows, CBOT wheat has now gained about 5 per cent since last Wednesday, retracing to the pre-August WASDE report level while corn was unmoved by the recent deterioration in the Midwest crop condition.
The £7.30/t weekly rise in CBOT wheat was considered to be technical, with traders squaring positions ahead of tonight’s highly important USDA WASDE report. The delayed US spring wheat harvest coupled with emerging Southern Hemisphere weather stories were good enough reasons for the ‘bulls’ to get excited too.
In Australia, the prolonged lack of moisture has led ABARES to cut its country’s 2019 wheat production forecast by 2.1mt from its June estimate to 19.1mt, compared with last year’s disastrous crop of 17.3mt. Bear in mind that the most critical period for the Australian crops is still ahead of us whilst temperatures are now rising and the forecast is still bone dry.
In South America, farmers are experiencing similar dry conditions, with the Argentine ‘Good-to-Excellent’ wheat ratings falling to just 39.2 per cent compared with 54.2 per cent last month and 47.4 per cent last year.
A short-term spike in price could lie ahead, with an expected reduction in the USDA’s 2019 US corn yield forecast tonight, prevailing dryness in key producing/exporting of grains in the Southern Hemisphere, and optimism surrounding US-China trade talks.
It is becoming increasingly obvious that European farmers are once again struggling with their autumn rapeseed plantings, due to overly dry conditions.
In a repeat of last year, farmers in many parts of northern France, Benelux and Germany, have watched as dry seedbed conditions and a lack of rains have combined to delay or prevent the crop from ‘getting going’.
The area harvested is thus likely to be reduced, which suggests EU rapeseed imports could again be substantial next season. Imports of about 6-7mt for both this and next year may be on the cards and prices given some solid underpinning as a consequence. Similar adverse conditions have been reported in southern counties of England.
The USDA’s monthly crop report will be published on Thursday evening. Traders will be focusing on both corn and soyabean yield forecasts. Soyabean crop conditions have been generally favourable, with a slight improvement in good/excellent ratings week-on-week.
The US soyabean balance sheet can tolerate a reduced yield/production estimate. Corn’s balance sheet has far less room for manoeuvre.
In Canada, canola harvesting progress is painfully slow, but with an anticipated production of about 18.5mt and exports almost half this total, there will be ongoing pressure here to make export sales.