Commodities - MARKETS OUTLOOK 1506

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Another giant grain crop on the way?

FUNDAMENTALS have tipped further in favour of the grain and feed consumer since our

April review as an ever loosening new crop supply outlook promises an extended period of cost

restraint. Until recently, the popular view among analysts had been for an inevitable decline in

crop yields from last year’s above normal levels and, in several key supplier countries, some

cutback in sowings in response to this season’s grain surpluses and low prices. But it was also

assumed the massive stocks carried over from the current season of plenty would cushion the

forward market against the crop decline – so no reason for any drastic price increases.

In late May, it looks more bearish than that, however, thanks to a relatively mild winter, ideal

growing conditions in most of Western Europe, improving weather in the US and the CIScountries, better spring planting conditions across North America, much bigger than expected

maize and soyabean crops being harvested down in South America etc etc.

Yes, wheat and maize crops may still be down a bit from last year’s record levels but only by

about 7.5m and 6m tonnes respectively, according to the US Agriculture Department’s rst

ofcial WASDE* forecasts.

The global maize crop gure is the more surprising of the two, since several analysts were

talking, just two months ago, of a decline for this grain of 40m to 50m tonnes, based on smaller

crops expected in the USA, West Europe, South America and the former Soviet Union. However,

USDA is now looking for a US decline of only about 15m tonnes, South America down by

perhaps 2.5m, Europe 5m or so and the CIS less than 2m. Also, partly offsetting these, is a

forecast 12m tonne-plus crop increase for China, the world’s second largest corn producer and

consumer.If the USDA is right (and there is a world of weather to get through before the main northern

hemisphere corn harvests actually start, from September onward) the global maize supply will

actually be about 19m tonnes larger next season than this when carryover stocks of 192.5m are

added onto the smaller crop. The world, then, may still be relatively awash with corn supplies

this time next year.

Global maize consumption, in turn, is expected to jump by about 13m tonnes next season due to

gains in China (+4m), Brazil (+2m, the US (+1.6m) and a host of moderate/smaller consuming

countries boosting their feed consumption of this now relatively cheap grain.

Even with these increases, however, maize demand will not outstrip the slightly smaller world

crop, leaving ending stocks by September 2016 at an almost identical level to this year’s with

stock/use ratio at a comfortable 19%.

Chances of actually reaching the 990m tonne

world corn crop are currently favoured by

several factors in the big ve producing centres.

In the USA, the crop is piling in ahead of

schedule, favoured by recent plentiful rains and

may even beat the USDA planted area forecast.

Even the recent talk of an El Nino climate

event – which can be a big problem for some

Asian crops in terms of a dry summers - has a

more positive effect on the Americas, tending

to promise moister, heat-wave–free conditions.

So USDA’s 346m tonne US crop forecast might

even prove the low end of possibilities.

European maize area is also expected to fallsomewhat after last year’s record harvest but

crops here have so far been going in under

mostly favourable conditions. Output might

drop by about 5m tonnes but carry-in stocks are

“After a record

three-year boom in

production, world

soya crops had

been expected to

decline in the coming

2015/16 season as

farmers reduced area

and yields deated

from the past year’s

unusually high levels.

However, the USDA’s

frst take on the new

crop balance now

suggests otherwise,

pitching the world

crop at 317m tonnes

– level with the past

season’s record

output. ”

by John Buckley

MARKETS OUTLOOK

74 | Milling and Grain


2/6June 2015 | 75

larger than last year’s and, if consumption here gets to the 78.5m

tonnes forecast by the USDA, there should be no difculty in

sourcing the required extra 4m tonnes or so of imports.

Concerns had been expressed about the CIS countries cutting

back on spring crop planting including maize because of

credit problems abnd inating input costs resulting from their

chronically weak currencies in the wake of the hostilities between

Russia and Ukraine, western sanctions against Russia and the

collapse of the latter’s oil export revenue caused by falling crude

oil prices. In the event, neither country appears to be dropping

maize acreage much, Russia possibly even planting more. CIS

maize yields may fall if less inputs are used but so far, the USDA

is expecting the two big regional maize producer/exporters to still

turn out about 38m tonnes – just 2m less than last year.

South American maize crops – while technically included in the

2014/15 global balance – do have a big impact on the calendar

year supply and 2015/16 season dynamics, being still in the midst

or tail end of their harvests as we go to press. USDA has actually

raised its estimate for the two big regional suppliers – Brazil andArgentina – by about 3.5m tonnes in total although some local

analysts think this continues to under-rate Brazil’s contribution

by as much as a further 4m tonnes. Either way, Brazil’s slower

than expected export campaign (disrupted by transport and port

worker strikes) is leaving it, for the second year running, with far

larger than usual carryover stocks to bring into 2015/16 – about

17-18m tonnes. The early outlook for the next Latin American

crop is again for ample supplies. USDA sees Brazil cutting back

on maize sowings a bit in response to farm credit issues and

lower prices (although its weak currency has to a large extent

protected farmers by bringing in more valuable dollars). However,

along with the large carry-over stock, it should have no difculty

meeting its foreign customers’ import needs. USDA even has it

raising exports by 2.5m tonnes in 2015/16 (whether or not yet

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more stocks might be added to its supply balance if its 2014/15

crop forecast is eventually raised by the aforesaid 4m tonnes).Finally, there is China’s ever growing maize crop which always,

somehow, seems to pace its consumption growth, enabling it to

minimize dependence on imports. These are far cheaper than the

maize China produces at home and its feed makers do from time to

time take advantage of that. However, despite its possible long-term

potential as a ‘mega importer’ China shows no sign yet of fullling

the forecasts made a few years back that it would need 10m to 20m

tonnes off the world market to meet its burgeoning feed needs.

Also, what maize imports it is making seem to be switching to

Ukrainian suppliers under long-term supply pacts. Although the US

has enjoyed some windfall sorghum export trade to the PRC,the

Beijing authorities seem to be trying to clamp down on this too.Apart from China, growth in world corn demand in recent years

has been mainly centred on Brazil, Argentina, Europe (especially

in big crop years like the last one), Mexico and the big Asian

feed importers. In the US itself, the corn ethanol bandwagon has

slowed while feed demand is starting to recover from the damage

done by high corn costs two or three years back – although a bird-

u outbreak is currently causing concern about demand from the

maize-rich poultry-feed sector.

Summing up, the world that used to depend so heavily on US

maize exports now has quite a choice of alternative, usually

cheaper, suppliers. Barring a summer weather upset in the US or

Europe (East or West) this summer, there is nothing really bullish

on the horizon for maize prices. Futures portray gently rising

forward prices, ranging up to 10% over the current deliveries

for July 2016 but it would not be surprising to see the actual

price similar to –even lower than it is now - based on the current

supply/demand outlook. Even the USDA is projecting stable

average US farm prices of corn for the coming season ($3.55-

3.85/bu or about $140-152/tonne).

Among the other coarse grains, the USDA’s new season outlook

also expects a similar barley crop to the past season’s as smaller

EU and CIS crops are largely offset by larger production in

Turkey, Morocco and Australia. For a second year, production

will slightly lag consumption but the resulting stock drawdown

will not create a tight market. Amid the abundance of corn andwheat supply, barley prices can’t get too far out of line without

risking losing custom. Sorghum output is seen rising slightly,

staying just ahead of forecast consumption. In total, coarse grain

stocks are seen staying at high levels for a third consecutive year.

Weather jitters stall wheat price dip

Halfway through the period under review, wheat prices seemed to

be in free fall again, weighed down by rising world crop estimates

and some periods of lackluster import demand. The bellwether

CBOT market by early May was trading $4.60/bu ($169/t) - a

loss of about 15% over the previous month’s value. This was also

just under the ve-year lows this market traded last September.

Europe’s own wheat futures market was meanwhile faring little

better, the nearby months trading down to the low €160’s/tonne

– almost 18% below their mid-March highs, if just over their

September 2014 lows.

However, in the space of a few weeks, the picture has been

transformed again into one of relative strength. Chicago was

recently back up to the $5.20s and Europe nudging €180.

The main catalyst has been a series of weather threats reminding

the trade that the vaunted big world what crop for 2015/16 is still

some way off harvest (some of it in the southern hemisphere not

yet even sown).In the US, the main concern has been a period of excessive

wet weather threatening to damage quality and possibly reduce

volume too, for the key hard red winter breadwheat crop, now

approaching or ready for harvest. Although US winter what

crops are in considerably better condition than at this time

last year, they remain below the long term average rating after

prolonged droughts and periods of frost exposure. Although the

usually high quality US spring wheat crop was being planted

early this year, that too was coming under a threat of frost and

dryness in the more northerly states where these classes of wheat

are mainly grown. Canada’s mainly spring-sown crop was

also said to b at similar risk of dry, freezing weather stressing

vulnerable newly emerged plants. Whether much damage was

actually done is unlikely to be fully proved until these crops are

more fully developed/harvested. Our guess at this stage is that US

total wheat output won’t be far off the USDA’s latest forecast for

a slight gain on the year. Given adequate carry-in stocks from last

year and persistent low demand for US wheat from the world’s

buyers (it has now been overtaken by the EU as top supplier)

that would be a more than sufcient supply. The same applies to

Canada, currently expected to produce something close to last

year’s 29m tonnes, which was one of its largest crops ever.

Other weather issues cited during late May included dryness in

eastern Australia, much of Russia and parts of Ukraine. India

has lost a few million tonnes of wheat to rain, hail and oods

in some areas and, rather than exporting to an ample-supplied

world market, has been starting to import some higher grade

wheat to make up for quality losses. The broader media publicity

given to the strengthening odds on a disruptive El Nino climate

event have also caused some excitement, despite its mostly

low correlation with wheat crop performance in the northern

hemisphere where the crop is mainly sown.

As in North America, there is a fair chance that none of these

regions will suffer major losses but it has made for more sellers’

caution – not least among the US market’s highly exposed fund

community who recently built a record short (sold) position on

the CBOT exchange, betting on continual wheat price falls. Theirscramble to cover these as the market began to bounce back

certainly enhanced that move considerably but, when things have

died down (assuming weather normalizing) it’s quite likely that

prices will retreat again.



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5/6

Another reason for this assumption is Russia’s recent return as a

major export seller. In the past month it has felt condent enough

about its own crop prospects – and the large stocks it is carrying

into the new sason – to drop its controversial export tax (imposed

when exports seemed to be draining internal supplies too quickly

at a time of crop uncertainty). Russia has already stepped in to

sell new crop wheat at cheap prices to Asia customers and will

doubtless soon be competing hard for the markets most contested

with other suppliers around the Middle East/North Africa

(MENA) region.

EU and other exporters are already concerned that, along with

cheap Ukrainian offers, this will push down the price at which

they can expect to trade overseas and, in turn, what producers will

get for wheat on the domestic EU markets.

World wheat consumption is not expected to grow much in

2015/16, according to the USDA forecasts – less than 0.2%

after this season’s 1.7% and the previous year’s 3.6%, as booms

in European and Chinese demand taper off. That suggestsworld stocks will increase again from an already large 201m to

over 203m tonnes - a 28%-plus stocks/use ratio that is hardly

constructive for wheat bulls. CBOT wheat futures do show price

premiums going forward of 8-10% but the EU futures market is

pressed to offer more than about 3% (spring 2017, rising to 6%

into the following year.

Europe’s own what crop is expectd to drop by about 6m tonnes

this year which, even with consumption at a relatively buoyant

123.5m and exports again at the heady 30m-tonne-plus level

will leave the Union with large seasonal ending stocks in

mid-2016. Provided crops perform as advertised, none of this

supports signicantly higher raw material costs going forward.However, with returns from growing wheat remaining low in

comparison with production costs, farmers in many countries

may justiably continue to grumble about whether it’s worth

growing the crop.

PROTEINS – where will all the soya go?

After a record three-year boom in production, world soya crops

had been expected to decline in the coming 2015/16 season as

farmers reduced area and yields deated from the past year’s

unusually high levels. However, the USDA’s rst take on the new

crop balance now suggests otherwise, pitching the world crop at

317m tonnes – level with the past season’s record output. Even

that may under-estimate the eventual out-turn if the USDA, as

many private US analysts suggest, is under-sating US planted

acres at 84.6m. Some of these other estimates ar 1m or more acres

higher still. Moreover, the USDA is looking for a fall in average

US yields to 46bu/acre from last year’s record 47.8bu. A month

or two back that seemed a reasonable suggestion. But the US

crop has been sown far earlier than usual and is currently in better

condition than at this time last year. With no immediate weather

threat (even the dreaded El Nino phenomenon can actually be

quite benecial to US crops in terms of preventing droughts and

heatwaves), it’s quite possible that the US will have an abovetrend yield again and a crop not far off last year’s record 108m

tonnes.

Moreover, Latin American soya crop forecasts for the 2014/15

season (still nishing harvests as we go to press) are still rising.

For the two main suppliers, Brazil and Argentina, some local

observers have these as much as 3m to 4m tonnes over the

USDA’s total 153m tonnes. Even without that extra supply, these

two producers are expected to nish the 2014/15 season with

record high stocks of about 57m tonnes. This buildup resulted

not only from their record large crops but from farmers holding

back supplies as a hedge against ination and collapsing local

currencies. Both Brazil and Argentina have also been beset with

labour problems affecting transport to ports, loading onto ships

and crushing at port mills to supply soya meal export markets.

The threat to export execution has dissuaded some foreign

customers from getting as committed as they might to Latin

American soya purchases until these problems are sorted out,

diverting more late season demand to US suppliers.

While that has helped the US enjoy a bumper period of

soyabean exports (and crush for meal exports) the largest

supplier will still have about 9.5m tonnes of soyabeans on hand

at the end of its own season in September against just 2.5m last

year. Going into 2015/16 season, then, the world will have about

85.5m tonnes (maybe more, if Lat-Am crops are revised up).

That’s quite a supply cushion against any weather upsets to the2015/16 crops.

One surprise in the USDA’s new crop forecasts is the even bigger

(new record) harvest it expects for Brazil (in early 2016) – despite

a lengthy period of economic stress during which crop nance

was expected to b a prim casualty. This is currently seen at 97m

tonnes versus this year’s 94.5m. Although Argentine output is

expected to retreat a little, world supplies – new production plus

stocks - will be about 20m tonnes bigger than last year’s already

massive 380m. The bounty goes on as, based on the USDA’s

crush forecast for 2015/16 (266m tonnes), global soyabean

carryover stocks (into 2017/18) will expand yet again to 96m –

equal to a normal whole year’s production from the US or Brazil.Global demand for soya meal is seen growing next season by

about 5% or 10-11m tonne, led by China (+3m) and Europe

(+1m). Clearly the raw material supply is there to cater for far

larger growth than this.



6/6

Soya meal accounts for just over two thirds of all global oilmeal

supply and it’s also the leading high-protein, quality benchmark -

so where it leads, other sectors of this market will have to follow.

For feed consumers this is a useful equation in a year of

stagnating production of other major oilmeal sources as it will

keep prices under control across the sector. The second largest

oilmeal source, rapeseed, for example, is expected to see its

crop dip by about 5% due to cutbacks in Canada and Europe,

albeit, at about 68m tonnes still one of the largest crops ever.

Sunowerseed output next season is seen stable at the past

year’s slightly lower level, cottonseed declines by about 6%

while groundnut meal increases by about 4.5% - though most

of the latter two meals are consumed mainly in the Asian

countries of origin. While soya will be called upon to supply

just about all the (10m tonnes) growth in global oilmeal demand

in 2015/16, it could clearly do that several times over on current

supplies. While the futures markets have small discounts on

forward soya meal prices it seems likely that these under-statethe extent to which costs could decline under this rich supply

scenario.

KEY FACTORS AHEAD - WHEAT

• The size of Russia’s crop –as low as 53m or as much 58m?

Either way it has large carryover stocks too and a reputation to

patch up as a reliable supplier. That should keep it in the van of

competitive sellers including Ukraine, helping to keep global

and EU wheat prices down.

• Will mostly favourable weather to date and higher crop ratings

presage a bigger than expected EU wheat crop this summer?

Dry sunny weather in the run-up to harvest will also be needed

to ensure milling quality but at this stage – again buttressed by

high carryover stocks - it looks promising for consumers.

• Is global wheat consumption growth under-rated by USDA

as some analysts suggest? The problem with this argument

is the often bigger ‘swing factor’ – how much wheat gets

substituted by maize in the feed industry, in turn dependent on

maize output. And what will happen to ethanol use of wheat in

Europe under the low oil-price scenario?

• World stocks of wheat carried into 2015/16 continue to offer

a thick cushion against any crop weather problems in the

months ahead.

• The further drop in wheat values close to or, for some farmers

below, cost of production remains an issue that may affect

future sowing plans.

COARSE GRAINS

• Will the US maize crop forecast be revised up if current ideal

growing weather continues? Either way, hefty stocks should

keep this market amply supplied in tyee season ahead.

• Ukrainian maize output will likely fall this year but remain

large in comparison with the previous decade, maintaining its

role as a cheap exporter to markets including the EU.

• Along with ample maize supplies from Latin America, thisshould maintain the more competitive global export market for

maize seen in recent years – another restraint on prices.

• A forecast smaller EU maize crop this summer may need more

imports but there should be no lack of supplies at competitive

prices.

• Competition for coarse grain custom will continued between

large maize, wheat and adequate barley supplies, helping to

contain feed costs.

• US ethanol use of maize (40% of the country’s consumption)

has perked up recently as grain costs fell but probable longer-

term weakness in crude oil markets should eventually rein this

trend in.

• China continues to curb import more sorghum and barley as

well as growing ever larger domestic maize crops, gainsaying

forecasts that it would soak up world maize surpluses.

OILMEALS/PROTEINS

• Huge soyabean crop surpluses across the Americas continue

to offer potential for cheaper global oilmeal costs as 2015

progresses.

• Will lower costs and ample supplies of inputs encouragemore demand than expected for these products in countries

developing livestock production systems – China, India,

Indonesia etc? Developed consumers like the USA may also

use more as high meat prices boost protability. There is plenty

of room to meet bigger demand without tightening supplies or

raising prices.

• Soya meal will continue raise its already dominant share of the

protein market, demanding price restraint across the sector.

June 2015 | 79

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Commodities - MARKETS OUTLOOK 1506