Grain & feed markets have been volatile in the past month, futures prices initially rising sharply on ‘outside’ buying, then dropping back again under the weight of more bearish supply news - with the notable exception of soya.

1. 74 | June 2016 - Milling and Grain
Funds fail to buck the markets
Grain & feed markets have been volatile in the past month, futures prices initially rising sharply on
‘outside’ buying, then dropping back again under the weight of more bearish supply news - with the
notable exception of soya.
The ‘outside’ influences were speculative funds looking for fresh investment opportunities amid
disappointment with returns from stock markets. Their revived interest in raw materials was also
encouraged by signs that the global economy might finally be working through the worst of the
recession as crude oil rallied further off its recent 12-year lows and other ‘industrials’ like metals
also saw a mini-revival.
Grain and oilseed markets joined the fray when the funds, long used to selling grain futures short
(i.e. betting on further price falls) decided they might have overdone that strategy and embarked on
a large covering buying spree.
Weather fuelled uncertainty in the Americas
In the US maize market, the funds even went net long (backing price rises) as some crop weather
events suggested supply might significantly underperform forecasts. The funds had already been
‘long’ soyabean futures for a while, despite the huge surpluses overhanging this market.
Fundamental support for maize was linked mainly to hot dry weather in Brazil, threatening to lop
several million tonnes off the country’s second or Safrinha corn crop. Some analysts said this could
reduce export availability by as much as 5million to 10million tonnes. Until this month, the USDA
had been forecasting Brazil’s corn exports would rise in the 2015/16 season (which ends August
31) by about 15.5million tonnes, to a new record 37.5million. That would effectively replace this
season’s reduced maize crops in Ukraine, Europe and South Africa as well as taking some market
share away from the top supplier, the USA.
Incessant rain was meanwhile plaguing the Argentine soyabean harvest, threatening to reduce a
near record 59million tonne crop by 3million to 5million tonnes and possibly spoiling quality of
some of the rest.
In North America, traders were also starting to get edgy about spells of rain interrupting US sowing
of 2016 maize and soyabean crops. Maize planting had actually got off to a flying start – and is
slightly ahead of the long-term average – 60-70 percent done as we go to press. But with rain still
causing problems in some key areas, there remains a risk of sowing falling behind and maybe
not meeting the higher acreage forecast by the USDA for this year. Soyabeans have more time
to get sown in the optimum window so could actually end up benefitting from any spare acreage
abandoned by maize planters.
If rains do linger on, this could become a more significant factor supporting maize prices and
perhaps weighing down on soya.
The combined effect of the American weather stories and fund buying was to push up the
bellwether Chicago
maize futures market
in late April to a
nine-month high of
over $4/bushel (about
$158/tonne) - almost
16 percent over its
early April low. Since
then, however, the
price has come all
the way back down
to the US$3.60’s.
Like maize,
soyabeans – the main
cost-driver for the
meal markets - have
also experienced
some tightening up of
their old crop supply
balance this month.
The main factor has
been flooding in
Argentina just as the
crop nears or reaches
harvest, leading to
predictions of crop
losses of three to five
million tonnes.
by John Buckley
MARKETS OUTLOOK

2. That’s despite a firming up in prices asked by the ‘Black Sea’ maize
exporters responding to the region’s strong export sales, last year’s
smaller-than-expected Ukrainian crop and a firming Russian rouble.
However, a strong counter-balance to all this is Argentina expecting
another larger-than-usual corn crop in the wake of a freer trade
regime adopted by its recently-elected new government.
Reconsidering this season’s overall global grain surplus
The price reversal also seems to have partly reflected a
reconsideration of this season’s overall global surplus of the grain.
For a third year running, world maize stocks are expected to equal
about 21 percent of annual consumption needs. That compares with
just an average for the previous three seasons.
The coming season’s global maize crop is also expected by bodies
including the US Department of Agriculture, the International
Grains Council and the UN Food & Agriculture Organisation to be
another large one. The IGC has recently raised its forecast to from
993million to 998million tonnes – 25million more than last year’s.
Although consumption is seen to be rising too, stocks are still
expected to increase yet more, to around 208million tonnes.
The first USDA take on the 2016/17 is being released just as we
go to press, offering a similarly bearish view of supply. It sees
new season’s global maize output rising by 42million tonnes to
1.011billion on the back of larger crops in countries including
the US itself (+21million tonnes), Argentina (+7million), the EU
(+6.2million), South Africa (+6.5 million) and India (+2 million).
The main odd man out is China, where cutbacks in government
subsidies are seen slashing output by about 6.6 million tonnes.
Interestingly, USDA sees world maize consumption almost exactly
keeping pace with the expansion in supply, rising by 43 million
tonnes as feed users respond to what are still low prices in historical
(let alone inflation-weighted) terms and taking the opportunity
to expand livestock, herds. The biggest gains in maize use are
expected to take place in the US (+9.2 million) and China (+9.5
Milling and Grain - June 2016 | 75

3. million), the rest spread over most of the regular maize consuming
countries.
None of this is really that supportive of higher maize prices going
forward. The CBOT futures market’s forward prices suggest that by
the spring of 2017, corn will be worth about 6% more than it is now
but this is really little more than a ‘carrying’ premium to pay for
storage. Futures aren’t always right but it’s interesting to note that if
we look back to May 2015, they were pointing to maize at about $4
per bushel a year hence – close to the recent high mentioned above.
While maize and soyabean fund buyers have recently been able to
justify some ‘risk premium’ on prices from weather upsets, wheat’s
inclusion in the fund purchasing spree has seemed less logical,
more case of this market ‘going along for the ride while the investor
mood lasts.
At one point recently, the CBOT wheat futures front month did get
as high as US$5.10/bu (about US$187/tonne) which was its best
since early November last year. Subsequently it has come back
down to the US$4.40s ($186/t). The European milling wheat futures
contract achieved more modest gains, the last current crop month
firming up to €157 before sliding back recently to about €147/
tonne, where it expired this month.
EU milling futures market
The first position quoted on the EU milling futures market now is
new-crop September which has been trading in the low €160’s/
tonne. Going forward, the price rises to about €178 by September
2017 and €183 for the 2018 crop. So futures point to milling wheat
being about 11 percent more expensive next autumn and 14 percent
up the year after that (i.e about 20 percent over the recently-expired
old crop price).
While 2018 price forecasts, for crops not even sown yet, are highly
speculative, the case for some wheat price premium going forward
might be made on a couple of factors. One is that the EU will
probably reap a smaller crop this year (but not that much smaller
than last year’s record one). The other is the need to get the price up
from the current ‘red-line’ level to one at which farmers can afford
to grow the crop.
Looking at the broader global supply context for wheat, new crop
(2016/17) production is currently forecast by both the UN Food &
Agriculture Organisation and the IGC about 4million tonnes higher
than last month at about 717million tonnes – about 2.2 percent
down on the year.
The IGC sees consumption down from 719 to 715million tonnes
but the FAO has it more or less unchanged, food use rising slightly
to offset a small drop in feed consumption. Overall, this still leaves
wheat stocks at a burdensome 218m tonnes according to the IGC or
195million in the FAO data. The latter is down by about 8million
tonnes on the year which is not really enough of a fall to turn this
market around.
The newly minted USDA forecasts for wheat are even less
supportive, envisaging a mere one percent fall in world production
in 2016/17, or about seven million tonnes from last year’s record
734million (which was also raised by about 3million tonnes from
USDA’s April estimate).
Declines in 2016/17 wheat output are seen mainly in Europe (-3.5m
tonnes), Turkey (-2 million), Ukraine (-3.2 million), the US (-1.4
million) and smaller producers (a combined 5.5m tonnes). These
are partly offset by gains in countries including Argentina (+3.2
million) and Russia (+2 million).
The impact of a smaller global wheat in 2016/17 is diluted by
the USDA’s forecast that world consumption will fall too, by 4.4
million tonnes to 712 million, led by EU (-2 million) and China
(-1.5 million). In both cases this is attributable to a switch to maize
feeding (the EU using more of its expected larger 2016 maize crop
and China using more of its huge maize surplus stocks).
USDA’s bottom line for wheat supplies next season, then, is even
larger surplus, ending stocks carried into 2017/18 rising from this
year’s record 243million tonnes to a new peak of 258million. That
mammoth number is mitigated somewhat by the fact that 45% of
it will be held in China where it is considered more or less’off-
market.’ Nonetheless this is a burdensome world total, much of
which will be concentrated in exporter countries. The EU for one is
seen carrying out stocks in July 2017 close to the 19million tonnes
with which it finishes 2015/16 next month. We have to go back
11 years to find a larger figure (24m). Even larger surplus wheat
stocks are likely to be held in the USA – a staggering 28m tonnes
versus an average 19m over recent years.
Large stocks provide a substantial cushion against any unforeseen
crop weather problems going forward and, as in the maize market,
offer no real incentive for consumers to stock up or ‘outside’
speculators to invest in wheat.
It should also be noted that wheat markets have not had the weather
support that maize and soyabeans have enjoyed in the period under
review. Currently, all the weather auspices are good for Europe,
Russia and the USA where crops should come close to, match or
maybe even exceed predicted levels.
76 | June 2016 - Milling and Grain

5. There are a few exceptions
Ukraine had a poor start to winter sowing plagued by drought, yet
seems to be improving after a mild winter and recent good rains.
India’s crop was hit by drought earlier and rain on the harvest but,
thanks to its large carryover stocks, its imports are not expected to
raise enough to materially affect global prices.
Canada’s stocks have been drawn down to unusually low levels
over two years of smaller crops and relatively strong exports - but
its 2016 outlook is currently for marginally higher production.
Australia’s crop has meanwhile remained large enough to maintain
its usual export role while Argentina – which left the ‘Big Five’
wheat exporters’ club in recent years, is making a significant
comeback.
World trade also has an important role in cereal price making
and here too the outlook for consumers is fairly encouraging. For
2016/17 at least, there are currently no surges foreseen in world
wheat or maize import demand big enough to spark price rises. In
recent weeks the general level of import tender interest has been
routine at best for both wheat and maize.
Wheat may pick up a bit more North African business after recent
dryness in Morocco and some other parts of the MENA region
but Iran is seen taking less and the USDA sees world total imports
actually falling by 1.6percent. EU maize imports that ballooned last
season to compensate for a disappointing domestic crop, should
sink back if this year’s forecast better harvest materialises.
Even if that is offset by more imports into drought-hit southern
Africa, the USDA still sees world maize trade staying flat at 133m
next season.
China remains a key factor to watch in the maize and soya markets.
In recent months, it gave the trade a jolt when it decided to abandon
years of expensive support for domestic maize production and
start drawing down some of the huge stocks it accumulated in the
process.
The influence of Chinese soya production
At over 100million tonnes, these currently equated to half the world
stock total and half Chinese annual consumption, so these will take
some time to reduce. In the long run smaller Chinese maize crops
might lead to higher dependence on imports. That has already with
soyabeans, Chinese production of which stalled years ago, making
it the largest global importer of the oilseed. (Interestingly Chinese
soya crops might start to recover in futureif they takeup land freed
by cutbacks in maize sowings).
In the near/medium term though, this shift in policy by the world’s
second largest maize producer will probably mean steep reduced
demand for foreign maize and products (chiefly dried distillers’
grains). It may also bring to an end the sales bonanza that US
sorghum and EU barley exporters have enjoyed to Chinese feed
users in the last couple of years.
The loss of the Chinese market may have consequences for value
of these commodities and possibly their future sowing plans. Less
demand for DDGs, the main by-product of the US ethanol industry
(which uses over 40 percent of US maize production) may also
affect the green fuel’s profit margins.
The tightening up soyabean crop supply balance
Like maize, soyabeans – the main cost-driver for the meal markets
- have also experienced some tightening up of their old crop supply
balance this month. The main factor has been flooding in Argentina
just as the crop nears or reaches harvest, leading to predictions of
crop losses of three to five million tonnes. The USDA’s latest take
on this is probably a bit conservative, lopping off only 2.5million
tonnes from its April forecast. However, along with one million
coming off Brazil’s and 1.4million off India’s harvest, it leaves
world output 4.3million tonnes lower than last month. World soya
crush on the other hand has gone up by 1.75million tonnes leaving
ending stocks tighter than expected. The problems in Argentina
have also diverted more soyabean import demand to the USA,
supporting higher crush too and resulting in end-season stocks,
there being cut by 1.6million tonnes – more than the markets
expected.
The USDA’s first forecast for next season suggests the world
soyabean crop will resume its long term uptrend with larger South
American and Indian crops (both +4.3million tonnes), only partly
offset by a predicted 3.5million tonne fall in this year’s US harvest.
More bullishly though, the USDA sees demand expanding by
more than supply, leading to a six million tonne drawdown in
global soyabean stocks. At 68million tonnes (by September 2017)
these would be 10million tonnes or 12 percent below this season’s
starting level. Within that total, the US stock is still expected to
be relatively large at some 8m tonnes but one third less than the
78 | June 2016 - Milling and Grain

7. 12million - plus it is expected to carry into the new season this
September (now also reduced to 10.9million).
However, it’s possible USDA is under-rating this year’s US
production potential – especially if planted area expands on rain-
delayed maize land beyond the official 82.2million acres (some say
it could add one to two million acres) – or fine weather (after all
that rain) builds higher yields than the USDA’s forcast ‘trendline’
46.7 bu/acre.
Although third largest soyabean exporter, Argentina is the main
soya meal exporter, supplying the world with twice as much meal
as Brazil and three times the US total. The European Union, in turn,
is the world’s largest importer of soya meal, expected to take in
about 21.7m tonnes next season or about one third of global exports
of the commodity.
The USDA expects world soya meal production to expand by about
7.5m tonnes in 2016/17 compared with 12m this season. As usual
the biggest growth factor in meal demand will be China (+4m).
News this month that China’s March soyabean imports had soared
33% on the year to a new record 7.07m tonnes seem to support this
bullish outlook for its longer term demand.
Fund buying has helped to boost soyabean prices
CBOT soyabean futures in May traded 23 percent over their March
lows and well over US$10/bushel, quite a feat given that this
market was expected to be weighed down with surplus to as low
as US$7 last autumn. Fund buying has helped boost prices but the
shortfall in Argentine output and the sustained strong demand from
China have played their part too.
Among the other major oilmeals fed in the industrialised world,
rapemeal production will decline with smaller world crop with
declines expected in Europe, the CIS countries, Canada and China.
Sunflower meal supply might edge up slightly with larger crops
in the EU, Russia, Ukraine and Argentina this year - but not by
enough too much impact the broader price trend.
The US futures price for soya meal has risen by about one third in
recent months. As the leading oilmeal (over 70 percent of the global
total) it will continue to lead a firm trend across the protein sector
in the months ahead, especially if the US gets one of its summer
weather scares. The retreating El Nino climate cycle now underway
is often linked to drier, hotter US summers that could be adverse
for soya yields. That may be one reason why the funds have so
consistently backed this market amid what is still a relatively large
global stockpile of the commodity.
Norwood and Company
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