Forecasting prices even one year ahead can be a hazardous business. That applies especially to markets so dominated by that most unpredictable element of weather and, increasingly these days; the sometimes even more capricious influence of global economic trends – trade and GDP growth, currency volatility, the price of crude oil, etc.

1. 76 | February 2016 - Milling and Grain
Another year of cheap & plentiful inputs?
Forecasting prices even one year ahead can be a hazardous business. That applies especially
to markets so dominated by that most unpredictable element of weather and, increasingly these
days; the sometimes even more capricious influence of global economic trends – trade and GDP
growth, currency volatility, the price of crude oil, etc.
Who would have thought that the latter would have halved for a second year running, with all
the implications for using food crops as fuel?
Also, many of the regular market outlooks come from crop producing countries - or from
‘outside’ investors – understandably skewed by wishful thinking to the price upside (Shell
punting crude’s recovery prospects in mid-January seems a good example). Also, consumers will
naturally see the factors that will help input costs fall in a more friendly light.
Forward futures markets are another guide to ‘price revelation’ but can also be heavily
influenced by speculative interests working their own agendas. That said, these instruments are
assumed to reflect the largest possible number of factors – known and likely sowing trends,
weather patterns, trade policy, influences on demand etc.
Looking at the three biggest futures markets that dominate the headlines – Chicago wheat,
maize and soybeans – this month suggests consumers don’t have much to worry about in terms
of a significant rise in raw material costs – at least for this calendar year.
Further forward, around the spring and early summer of 2017, that view changes as prices
begin to point ‘North’ a little more significantly (over 10 percent higher for wheat – a trend
reflected in the EU wheat futures markets too). Yet at this time last year, Chicago wheat was
forecast to rise to the US$6.20’s per bushel and it’s recently been trading in the US$4.50s,
Corn’s year-hence prediction was a bit closer in the US$4.40s (versus the US$3.60s now) while
soybeans were way out, looking for over US$10 per bushel now against under US$8.80 actually
trading as we go to press.
A key factor restraining the prices of grains and oilseed in the year ahead will remain to
be the high levels of stocks carried from one season to the next. These will provide ample
cushions against all but the most severe weather disruptions to this year’s crops (though current
pointers suggest all three of the market leading crops will be large again in 2016 if the weather
is ‘normal.’ The USDA has recently raised its forecast of surplus wheat stocks yet again to a
new record peak of 232million tonnes; five million more than it estimated at the time of our
last review in November; and equal to about one third of annual global wheat consumption.
Maize stocks, although trimmed slightly since last year, still amount to almost 22 percent of
consumption while soybean stocks are about 29 percent of the estimate global crush.
On the demand side, world wheat consumption is apparently growing by less than 1.3 percent
or 9 million tonnes during the current season (which ends halfway through 2016) – about the
same trend as in 2014/15. Maize consumption on the other hand, actually seems to be falling by
about one percent (9.7million tonnes) after a couple of years of very strong growth.
World consumption of oilseed meals is meanwhile expected to grow at a more robust 3.75
percent - about 11million tonnes. But even that marks a slowdown from the 5.95 percent
growth that it achieved in 2014/15. This lacklustre growth in demand (which may yet prove too
optimistic if the world economy continues to sag and it does look likely that is to be one of the
main restraints on commodity prices in 2016.
As we go to press, market sentiment is dominated by ‘fear factors’ led by the spectre of failing
Chinese economic growth and its implications for the global economy. No less important has
been the collapse of energy markets and its potential destabilising impact – both on the oil
supplier countries and their trading partners.
How ironic that the flip side of rocketing oil prices - the very factor that presaged the economic
problems and rocketing inflation of the 1970s - should be viewed so negatively in 2016?
Cheap crude oil and slowing global trade are also reflected in a further steep decline in ocean
shipping costs. The leading indicator, the Baltic Dry freight index fell in mid-January to its
It is not surprising
that, amongst the
largest crop futures
markets, soybeans
show the weakest
forward price ‘curve’
– the distant months
on the bellwether
CBOT market (ranging
into 2018) showing
hardly any significant
premium over the
current spot or cash
values.
by John Buckley
MARKETS OUTLOOK

2. lowest level since records began in 1985. That is good news for
grain importing countries, effectively widening their choice of
supplier to more distant origins with minimal additional transport
cost.
Wheat Outlook
Global wheat prices have struggled to get far off the five-year
lows they reached earlier this season in response to record 2015
crops and stock build-ups. A mild rally in Chicago in December
and in the EU at the turn of the year largely reflected the ongoing
concerns we highlighted in our last review about crops in the
former Soviet countries being at greater risk of ‘winterkill’ after
droughts downsized and delayed planting plans, emergence and
development.
However, the two main producers, Russia and Ukraine, have
been a bit luckier since with some much needed showers and a
long spell of unusually mild conditions, probably helping some of
those crops that were border-line for abandonment manage to get
established after all. Some snow cover also arrived just in time to
protect crops as weather turned more typically colder.
That said, by mid-January it seemed much of that snow had been
washed away in Ukraine, where winter crop losses will likely still
be quite substantial. At this stage, that land seems most likely to
go to maize – to make up for last year’s crop shortfall in Ukraine’s
largest export grain – and possibly to sunflowers too. Russia, the
largest wheat supplier of the two, is probably doing rather better
than Ukraine and is officially expecting a crop not much smaller
than last year’s big one which, officials now claim, reached a new
record 61.8million tonnes (versus 2014’s 59.7million).
If Ukraine does produce, say five million or six million tonnes
less wheat this summer, as some analysts suggest, it will not be
game-changing in terms of global wheat export availability or
world wheat export prices which, nowadays, have considerable
influence on domestic prices on European and other consuming
markets.
Argentina resurfacing as an important export force could
potentially partially offset this as its new more liberal government
frees up trade from quotas, export duties and currency controls.
With the ink hardly dry on these edicts at the turn of the year,
Argentina has already been undercutting not only the usually
cheapest Russian and Ukrainian suppliers but also the EU – which
had recently been offering the best fob quotes (before freight) to
big buyers like Egypt.
For wheat, maize and soya, Argentina’s new ‘business-friendly
administration is likely to result in larger sown areas and a rising
export presence in years to come. As recently as 2011/12 season,
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3. before government ‘interference’ reached its most restrictive
phase, Argentina exported almost 12million tonnes of wheat –
three times what it sold abroad last season and seven times what it
exported in 2013/14.
It was interesting this month to hear reports that Argentina
had even sold some feed wheat recently to US hog producers
‘bearding the lion in its den.’ It has also made unusual sales to
of feed wheat to Asian markets and milling wheat to the Middle
East.
Among the biggest producers of wheat, European farmers are
estimated to have sown a similar acreage to last year’s, some
countries a bit less, some more. So far, the mostly trouble-free
sowing campaign and a mild, often rainy winters have seen crops
well established and in very good condition in the majority of
member states.
We still have to see what the weather might bring at the tail end
of winter and how summer rains and sunshine will shape up for
yields and bread-making quality. But at this stage, the foundations
are there for another big crop.
Meanwhile estimates of the EU’s last one keep on rising. The
latest estimate from the USDA is for just under 158million tonnes
– a new record high and 1.45million tonnes over the previous
peak of 2014/15. So for two years running the EU wheat crop has
been almost 20million tonnes over the average of the previous
three.
Will 2016 make that a hat trick? Even if EU production eases
back by, say, 5million tonnes? It will still be very well, if not
over-supplied. At this stage, the current season is forecast to finish
with record carryover stocks of about 19.3million tonnes – 6
million more than it started and 9.4 million more than at the close
of 2013/14.
That forecast also assumes the EU will find export homes for
at least 32.5million tonnes amid the competition from the CIS
countries, Argentina and others. It is possible but not guaranteed.
In addition to strong CIS competition, Canadian wheat exports
are so far running 4.6 percent higher this year than last while
Australia has been forecast to raise exports by about 1million
tonnes.
The last and by no means least piece in the wheat supply jigsaw
is the USA, traditionally the largest single country exporter but, in
recent years, narrowly overtaken by Russia.
A key factor keeping Chicago wheat futures prices on the floor
this past year has been the poor performance of US exports – not
surprising as these can account for over half its crop disposals.
From a recent peak of 31.5million tonnes these have slumped to
around 22million and are expected to stay that low this season.
As in the EU, this has resulted in a big buildup in US carryover
stocks from 16million in 2013/14 to 20.5million at the start of this
season and a projected 25.6million at its close.
That accumulation of stock completely negates the impact on
US supply of a recently estimated cut in its winter wheat sowings
(the lion’s share of production). In early January, the USDA
issued an estimate that area would drop 7 percent - far more than
the markets expected and including a 9 percent cut for hard red
winter breadwheat – the largest US export component.
The trade had been expecting something closer to 3-5 percent
but clearly those weak prices and poor exports are feeding back
now to farmer choices.
Total US wheat area for harvest 2015 had actually risen by 1.5
percent, putting it almost 3.9 percent over 2013/14. That was
almost double the world trend (plus 2.2 percent over the two years
as CIS and European countries also raised plantings).
Foreign customers probably don’t need to worry too much,
though, as this simply presents an opportunity for the US (if it
can muster enough trade amid the strengthening US dollar) to
start reducing its excess stocks. Moreover, the USDA also views a
possible yield increase keeping the US crop as large as last year’s.
Overall then, barring some severe weather upset in the next
few months, there seems like chance that the world will run short
of wheat in the near future. Export competition, heightened by
Argentina’s return, and lack of growth in global wheat trade
should combine to keep prices trim on world markets and
European values should reflect that.
If maize output rebounds in 2016, that will put further restraint
on the feed sector – which accounts for almost one fifth of world
wheat use and as much as 45% in the EU.
The USDA’s first crop forecasts for 2015/16 season were
made back in May 2015, expecting world wheat production of
719million tonnes. That has now risen to 735m due to larger than
expected crops in Europe, Russia and Ukraine.
Maize Outlook
Maize prices finished 2015 with an on-year loss of almost 10
percent on the leading indicator, the CBOT futures market. The
78 | February 2016 - Milling and Grain

4. current forward futures price ‘curve’ suggests they could put most
of this back by the end of this year; which then flattens out for
virtually all of 2017.
Key factors driving the current market are last year’s smaller
than expected global crop, offset by an even bigger cut in
consumption. Last summer the USDA’s forecast global output of
990million tonnes. It’s now seen 16million tonnes lower after dry
weather cut crops in Europe and Ukraine. But the consumption
estimate has meanwhile dropped by 200m tonnes, resulting in the
end season stock forecast rising by 20 million.
Most of that is considered ‘off-market’ within China where the
USDA has drastically revised down its estimates for consumption
(including recent historical numbers). However, this may have
implications for trade and for prices going forward.
Carrying over 87million tonnes – more than a third of the global
stock total and spending a fortune propping up domestic crops
at inflated producer prices, China is expected to cut back on
these supports and continue its efforts to auction off old stocks.
In the near term, that implies less demand for imported corn
(about 2milllion tonnes a year in recent seasons and as much as
6.8million in 2012/13).
But going forward – probably well beyond 2016 – this suggests
lower Chinese crops and possibly more reliance on imports. China
is also seen cutting back on imports of dried distillers grains; the
by-product of corn ethanol grinding. This could have a big impact
on the main source, the USA, where ethanol producers depend on
this trade for part of their profits.
However, even amid the current bearish pressure from weak
crude oil markets, output of the green fuel is so far still running
at record levels and expected to account for a stable 44 percent of
US corn use (about the same as its feed industry).
The early auspices for 2016 suggest no drastic change in planted
area within the USA but probably a big yield rebound in Europe
and more planting in the CIS countries on failed winter wheat
land. That applies particularly to Ukraine, where corn sowings
could be up by as much as 10 percent.
Milling and Grain - February 2016 | 79

5. Russia is also expected to sow another large crop. Its corn output
last year was a record 12.7 million versus 2014’s 11.3million on
higher planted area and a sharp rise in yields. Exports from this,
the second largest CIS supplier have been running at about four
million tonnes this season and the last two – about double the
level in recent prior years.
From the other main supplying region, Latin America, the
USDA currently expects smaller but harvests than last year
but these will still b e well above the average of recent years,
arriving in the spring. Some analysts think these may be under-
rated at 25.6million for Argentina (v last year’s 26.5million) and
81.5million for Brazil (85million).
Both were still sowing as we went to press – Argentine farmers
making a last minute response to their new government’s laxer
trading rules and Brazil trying to make up for a slightly late soya
crop delaying its second-crop/Safrinha maize sowing. Brazil
seems to have consistently beaten USDA crop forecasts in recent
years. Both countries also have larger than usual stocks; which
in Brazil’s case may allow exports to rocket this season from
22million to 35million tonnes.
Latin American and Ukrainian maize exporters have already
been providing stiff price competition for the traditionally
dominant US suppliers whose share is falling as their trade slips
well under the forecast pace; down 20 percent on the year so far.
Ukrainian maize imports have meanwhile been piling into the EU,
adding pressure on feed-wheat prices and helping to keep maize
costs here under control after last year’s EU corn crop failures.
Going forward, Argentine maize production is expected to get a
big boost – some analysts think by as much as 20-30 percent, as
the Argentinian government relaxes their export quotas, abolishes
duties and loosens exchange controls; allowing the weak peso
to sharpen its export prices. Given the amounts farmers have so
marketed, the peak pressure from these moves is clearly yet to
come, probably starting from first quarter 2016 onward.
On the current planting outlook and, given the drop in this
season’s consumption and no growth in world maize trade, there
is little here to justify firmer prices going forward. However, as
in the wheat market, we have to see what spring and summer
weather will bring.
Oilmeal Outlook
It is not surprising that, amongst the largest crop futures
markets, soybeans show the weakest forward price ‘curve’ – the
distant months on the bellwether CBOT market (ranging into
2018) showing hardly any significant premium over the current
spot or cash values.
The reason remains as outlined in our recent reviews, the huge
global stock build-up from recent bumper soya harvests in the
main North and South American source countries, the likelihood
that all three (US, Brazil, Argentina) will continue to sow big crop
areas and, not least, the slowdown in growth of global demand for
oilseed meals.
In the current season, consumption of the eight most important
items is expected to increase by about 3.75 percent or 11million
tonnes compared with last season’s 5.95 percent (16.5million)
and the previous year’s 4.85 percent (12.8million). Amidst the
slowdown/contraction in production of several other major oilseeds,
most of this growth will be supplied by market leader soya.
This abundance is reflected in European prices of soya meal
which, in dollar terms at least, have declined again since our
last review, although the bonus has been offset by the chronic
weakness of the euro, down over 10% over the past twelve
months.
In late January, the CBOT soybean market seemed to have
bottomed out somewhat after its steep fall in 2015 but some
analysts will not be surprised to see it go lower still. Recent
support came initially from slow Brazilian sowing – which has
now more or less caught up – and latterly from US export sales
picking up and then the USDA revising down its 2015 crop
estimate (although the latter remains record large.
Overall, the USDA has reduced its estimate of global soya
surplus stocks from 85million tonnes when the season started
last autumn to about 79million tonnes. That’s a step in the
right direction for farmers wanting better prices but is also a
record large figure equal to almost 30 percent of global crush
requirements.
Amid good weather, Brazil and Argentina remain on course
for another year of large production, coming on stream from this
month onward. The US is expected to sow at least as much soya
as it did last year. Whilst weather and other factors might mean
other big producers like China and India grow a bit less in 2016,
they are not pivotal to export supplies.
Further forward, the weakness of Brazilian and Argentine
currencies is offsetting the price fall in financial terms on the
world markets on which both depend. Brazilian farmers are
actually getting as much or more for their soybeans in their own
currency as they were before the global slump so have no reason
to cut plantings next Autumn for harvest in 2017. Argentine
farmers will also grow all the soybeans they can as their Peso
currency also drops and their government continues to favour
export trade.
Rapeseed supply prospects have improved since our last
review as Canadian officials raised their 2015 crop estimate by
a surprisingly large three million tonnes, rather than the one
million expected by the trade. It puts a much looser slant on
this market, earlier facing its tightest stock outlook for some
years.
The effect has faded somewhat in recent weeks however, due to
strong Canadian crushing and exports, also now exceeding official
forecasts. Rapeseed also drew support from reports highlighting
the poor state of much of Ukraine’s crop after a drought delayed
sowing and stressed emerging crops.
This important EU source could see output down by a third or
more. Europe’s rapeseed crop outlook has been mixed, pointing to
larger German but lower French and UK winter sowings although
crops are at least in good shape after their mild, damp start.
Consumers will be hoping that Canada can fill a bit more global
import demand, especially to largest importer China, leaving
Australian producers to sell more here.
Sunflower-seed supply was also ratcheted up a bit in recent
months by better than expected Russian and Ukrainian 2015 crop
estimates. Sunflower sowings could rise this spring in CIS & EU;
we will hopefully cover this topic in more detail on that in our
next review.
While overall oilseed production is down this season (mainly
rapeseed and cottonseed) oilmeal supply will be adequately
maintained by the large soya supply, keeping pricing across the
sector under control – in financial terms at least.
80 | February 2016 - Milling and Grain