Constantly rising wheat crop estimates, record large global stocks of cereals in total and mostly ‘yield-friendly’ weather in the Northern hemisphere have continued to erode grain prices over the past month, resulting in US wheat trading near 10-year lows.

1. 82 | August 2016 - Milling and Grain
Although China
is still a major
contributor to global
markets, USA and
Canada are expected
to make a comeback
and be reinstated to
the summit of world
grain producers in
the not too distant
future
Cereal prices on the floor
Constantly rising wheat crop estimates, record large global stocks of cereals in total and mostly
‘yield-friendly’ weather in the Northern hemisphere have continued to erode grain prices over
the past month, resulting in US wheat trading near 10-year lows.
Markets seem to have adjusted with remarkable speed to the loss of millions of tonnes of
Brazilian maize exports to drought, confident that large US stocks will tide consumers over
comfortably until the promised next round of better US, CIS, European and South American
corn harvests.
Neither have some significant quality threats to rain-interrupted wheat harvests in the US,
Europe and the CIS countries offered much help to die-hard bulls. Breadwheat premiums over
ordinary, biscuit and feed wheats might be up quite sharply but the price base from which they
apply is well down.
That traditional benchmark, the Chicago soft red winter wheat futures contract, for example,
has been trading almost 23 percent below its recent highs. CBOT maize dropped too, by as
much as 24 percent in the past month, setting its own near two-year lows and sharpening the
competition between the two grains for US feed outlets.
A similar story is emerging in Europe where the usual rivalry is expected to build between a
larger feedwheat crop, a resurgent corn harvest and plentiful barley supplies.
‘Macro markets’ – equities, crude oil and other economic indicators have also remained
bearish, especially since the shock outcome of the Brexit referendum. Despite the brave face put
on things by the Brexiteers, analysts around the globe are nervous about the potential negative
fallout – psychological and actual - on a still febrile world economy.
As well as the Euro-zone’s problems, markets are also concerned that China is still slowing
down, dragging with it emerging economies around the globe - which can’t be good for
by John Buckley
MARKETS OUTLOOK

2. expanding demand for key food and feed ingredients.
The reversal in crude oil markets after their short-lived rally, is
another negative for crop markets to deal with, signalling a less
encouraging climate for bio-fuels made from grains and oilseed
products.
Among all this gloom and doom (for the suppliers), the odd man
out has been the soyabean complex, which has risen by almost
40 percent over the second quarter of the year to reach its highest
level in almost two years. The accompanying increase in soya
meal prices has been even bigger as flood losses to Argentina’s
bean crop curbed supplies from this, the largest meal exporter.
That too may be ‘topping out’now, however, as traders take a more
sanguine view of Latin American crop losses and the consequent
surge in demand for US beans behind this unexpected rally.
Cheaper grain and feed raw materials are, of course, good
news for the consumer (soya meal aside). But with forward
grain futures markets pointing to relatively modest potential for
price recovery, the question is still posed, how long can cereal
producers put up with the collapse of farmgate prices?
The Latin Americans, Russia and Ukraine have been shielded
to a large extent by their weak currencies, bringing in good
returns from their dollar-traded commodity exports. But even
amid the weak euro, European grain producers are disappointed
with current returns, likewise their US, Australian and Canadian
counterparts.
While the large stocks will provide a buffer for one or two years
going forward, growing markets will need a larger supply down
the road. But the direction in which prices are pointing suggests
that production gains will be increasingly coming from the weaker
currency areas – Lat-Am and CIS countries while the US and
other Northern hemisphere suppliers may have to think about
reducing their contributions.
Table 1: Main maize producers
2014/15 2015/16 2016/17
USA 361.1 345.5 366/386?
China 215.6 224.6 218
Brazil 85 77.5 82
Ukraine 28.5 23.3 26
Argentina 28.7 27 34
EU 75.8 58 64.3
Russia 11.3 13.2 14
S Africa 10.6 6.5 13
World* 1013 966 1,012/1,032?
*includes others
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2016-05-31, Grain & Feed Milling.indd 1 31-5-2016 10:55:13
Milling and Grain - August 2016 | 83

3. 84 | August 2016 - Milling and Grain
Yet more wheat
The USDA’s world wheat crop estimate has gone up by almost
4m tonnes in the last month and the International Grains Council’s
by 7m- both now around 730m tonne mark. Increases have been
made for the USA, Europe, Russia and Australia. In recent weeks,
the European picture has been slightly less optimistic with rain
damaging the French crop – yields as well as quality.
Some closely followed analysts looking for a drop of about 1.5m
to 2m tonnes to trim the EU total which the USDA has at 157.5m
versus year’s record 160m and the IGC’s 154.6m (including
145.7m common wheat and just under 9m durum).
Against that, a new government estimate has raised US planted
area to 50.8m from the March planting intentions report’s 49.6m,
implying about 1.3m tonnes to add to the last USDA forecast of
56.5m tonnes.
Private and government analysts in Russia have meanwhile been
talking the coming crop up as high as 65m tonnes, which would
be a post-Soviet era record and 1m to 2m over the USDA and IGC
forecasts respectively.
In contrast, Canada’s official estimate of planted wheat area
was updated in late June to show a 9 percent fall in spring wheat
plantings offset by a 5 percent increase in durum. That’s a bit
lower than the markets expected and may require some trimming
of crops estimates currently around 28.5/29.5m from USDA & the
IGC respectively.
Australia’s crop meanwhile seems on course for at least the
25/25.5m tonnes seen by these two bodies – which would be
among its larger crops of the past decade. However, dependent
upon exports for 70 percent of their crop disposals, Australian
growers are reported to be concerned about the global price fall
and could consider cutting back planting next season, according to
some observers.
But in response to recent trade liberalisations under its new
government, Argentina is expected to give a big boost to wheat
sowings, expanding the crop by 3m to 5m tonnes, consolidating
its return to the fold as one of the world’s largest wheat exporting
countries.
The USA’s June count of domestic wheat stocks meanwhile
turned out a bit larger than expected – a 29-year high of over 27m
tonnes and about 30 percent up on last year’s. With EU starting
stocks of wheat also estimated to have risen by 35.5 percent on
the year and world total stocks in total running at 36 percent
of consumption needs, it is easy to see why wheat prices are
cracking again.
Another bearish figure highlighted by the IGC is the volume of
stocks held by the major exporting countries. This is estimated to
have grown from 54m tonnes two years ago to almost 68m and is
expected to rise again to 72m
by the close of the new season that started on July 1.
Lack of consumption growth is another part of the bear story for
wheat. The IGC has 2016/17 off-take rising by a mere 1m tonnes
or 0.1 percent as increased demand from the food sector is offset
by lower feed use - livestock producers using more of an expected
bigger maize harvest.
The one, relatively, firm spot in the wheat market is better
quality wheat, able to command bigger and bigger premiums as
milling crops in the US, Western Europe and the CIS encounter
wet harvest weather. In the past few weeks, premiums demanded
for better quality (12.5 percent protein) over ordinary hard red
winter wheat – the USA’s main export grade - have rocketed from
around $9 to almost $30 per tonne on fob terms, if still quoted a
lot cheaper than a few months ago.
Although it started well, the usually high quality US spring
wheat crop has seen its condition deteriorate amid dry weather
recently, driving export fob prices for this class of wheat up
recently, abeit from some of their cheapest levels of the last
decade.
In Europe, reports of lower proteins in the rain-affected
French wheat crop, Europe’s largest, have been turning demand
increasingly toward German wheat – not unaffected by the bad
weather but probably mostly escaping the worst of its own rain
interruptions. That in turn has been driving up German price
premiums. The quality issue is also affecting EU export trade,
with recent import tenders tending to favour either wheat from
Germany or the unaffected Baltic States, able to offer better
quality and more competitive prices.
Thanks to better results this year in Hungary, Rumania, Bulgaria
and Spain, the overall EU wheat crop will still be relatively large at
around 157m tonnes but along with currency weakness, the concerns
about quality are expected to keep prices firm at the top end.
Maize crop set for recovery
Maize prices have recently dropped to near two year lows on the
CBOT futures market after the USDA estimated US sown area
at 94.1m acres - the third largest in 72 years and 500,000 over
the Department’s March forecast. Markets had actually been
expecting a reduction of 1m to 2m acres based on uncooperative
sowing weather and a steep rise in new-crop prices of soyabeans –
which can be sown later than maize.
Based on the old figure of 93.6m sown acres, USDA had
84 | August 2016 - Milling and Grain

5. 86 | August 2016 - Milling and Grain
expected trend yields to extrapolate into a 366.5m tonne crop
versus last year’s 345.5m. An extra 5.3 percent of land would
equate to a crop closer to 386m tonnes, easily beating any
previous record.
Piling on the pressure the USDA also estimated June 1 US
maize stocks at a larger than expected 120m tonnes, their largest
since 1988. That suggests the USDA’s already comfortable stock
forecast for the start of the new season in September (43.4m
tonnes) can also be uprated.
While the Brazilian crop has turned out far smaller than
expected (see table 1) world total maize production this season
has continued to run neck and neck with consumption so
drawdown of the comfortable global stocks carried in from
2014/15 will be minimal. For the season ahead, the combination
of resurgent production and still large carryovers will mean total
supply increases by about 2.6 percent or some 31m tonnes.
Maize consumption is, as mentioned above, expected to grow
far more rapidly than that of wheat in the more abundantly
supplied – and cheaper – season ahead. The current USDA
forecast expects it to grow by 45m tonnes, the IGC by 30m.
Even than, world stocks carried out of the new season (in
September 2017) are seen holding fairly steady, extending the
period of comfortable supply.
The main uncertainty on that front is a potential heatwave
for the US crop in the July/Sep period as the El Nino weather
phenomenon flips over a La Nina effect. Even then, the long-
range forecast is for adequate rains in that period which should
help reduce heat stress – and the crop has already got well into its
crucial pollination period under the desired mild conditions.
Further forward we can expected maize production to
increase in Argentina as the trade and currency liberalisations
introduced by the new Macri government earlier this year
pay dividends in higher [planted areas. Brazil’s government
is also looking at incentives to swing more land into maize
crops, which have taken second place in recent years to ever-
expanding soyabeans.
Nearer term, expect larger crops in the CIS countries to find their
way onto export markets, before long, including top customer
Europe; where the cheap coarse grain imports will continue to
provide competition for locally produced and imported feedwheat.
As the futures markets currently suggest, there is not much on
the horizon to upset this ongoing picture of plentiful maize, with
the usual caveat - normal, summer weather permitting.
Protein price surge led by meal-rich soya
Soya meal prices have seen a spectacular surge in second
quarter 2016 – in US$ terms, monthly averages have risen by
about 35 percent from March to June. The root cause has been
the unexpected loss to floods of a least 2m tonnes Argentine
and perhaps 3m of Brazilian production to flood and droughts
respectively. That has led to world output actually declining by
about 6.5m tonnes this season.
While significant, the magnitude of this loss does seem to have
invoked an over-reaction on the markets, helped by the usual
culprits, the speculative funds. The current season did, after all,
start with surplus stocks of 78m tonnes – 16m more than the year
before, putting overall supply at 391.6m tonnes or 10m more than
in 2014/15. Even with global crush rising by 16m tonnes, this
still leaves soyabean ending stocks at a hefty 72m tonnes- which
is hardly tight.
In the immediate period before our press deadline, the markets
seem to be gaining more of a sense of proportion with the CBOT
futures reining back quite sharply from their near two-year highs.
The reversal has been encouraged by the USDA raising its US
planted area estimate from 82.2m to 83.7m acres, equating to a
(potential) extra 2m tonnes or so of soyabean output. The USDA
also estimated June stocks higher than the markets expected.
Finally, the delayed South American harvests have accelerated
and should now provide stiffer competition to US bean and meal
exports, implying room for some price trimming.
Further forward, the Latin American crops sown this autumn
are expected by the USDA to expand by about 6m or 7m tonnes,
contributing to an approximate 10m tonnes increase in global
soyabean output.
Other oilseed supplies will grow more slowly. European and
Canadian rapeseed crops not far off last year’s levels suggest
not much change in global supplies of the second most importat
contributor to world oilmeal production. Sunflower supplies
may expand by about 3m tonnes or 8 percent, however, with
bigger European, Ukrainian, Russian and Argentine crops while
cottonseed supplies are also expected to rise.
Overall, oilmeal supplies should be large enough to cope with
the coming season’s expected 10m or 3.2 percent increase in
global consumption without further price rises and, as soya
markets settle down, hopefully some reduction in costs.
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