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.

1. 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 CIS
countries, 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 first
official WASDE* forecasts.
The global maize crop figure 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 five 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 fall
somewhat 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 deflated
from the past year’s
unusually high levels.
However, the USDA’s
first 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. June 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 difficulty 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 inflating 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 and
Argentina – 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 difficulty
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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3. 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 fulfilling
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-
flu 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 and
wheat 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 five-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 sufficient 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 floods
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. Their
scramble 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.
76 | Milling and Grain

5. Another reason for this assumption is Russia’s recent return as a
major export seller. In the past month it has felt confident 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 suggests
world 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 significantly higher raw material costs going forward.
However, with returns from growing wheat remaining low in
comparison with production costs, farmers in many countries
may justifiably 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 deflated from the past year’s
unusually high levels. However, the USDA’s first 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 beneficial to US crops in terms of preventing droughts and
heatwaves), it’s quite possible that the US will have an above
trend 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 finishing 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 finish 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 inflation 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 the
2015/16 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 finance
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.
78 | Milling and Grain

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.
Sunflowerseed 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-state
the 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, this
should 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 encourage
more 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 profitability. 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