CROP farmers anxiously watching prices fall to ever less remunerative levels have had further unwelcome news over the past couple of months from yet higher cereal and oilseed crop estimates across the Northern Hemisphere.

1. 72 | October 2016 - Milling and Grain
Prices might have
stayed down or
dropped further still
if not for ongoing
concerns about the
proportion of higher
quality milling wheat
in this year’s mix.
Wet harvest weather
has lowered protein
content of US hard red
winter bread wheat –
its main export grade.
Supplies just keep on growing
CROP farmers anxiously watching prices fall to ever less remunerative levels have had further
unwelcome news over the past couple of months from yet higher cereal and oilseed crop
estimates across the Northern Hemisphere.
World wheat production has been raised from 731m to 745m tonnes and is now 10m over
even last year’s giant crop, according to the US Department of Agriculture. The move follows
combined increments to US, Russian, Ukrainian, Australian and Canadian production, far
outweighing a steep downward revision in the EU’s prospects since mid-year (which may not be
the end of that story).
In a season of flat growth in world wheat trade – the arena in which international value is
‘made’ – even a prospective 8.7m tonne drop in Europe’s wheat export potential seems to be
getting swallowed up by the growing competition among its key rivals.
The USDA has also marked up consumption by 20m tonnes since mid-year, putting it some
27m over last year’s (gains mainly in the US, China and India). However, that fails to stop world
wheat surplus stocks rising from last year’s 241m to 249m tonnes – their highest ever level.
The bellwether US wheat futures markets – which started the season under the impression that
world output would decline this year - have responded by trading down to fresh 10-year lows,
shedding about 30% of its peak 2016 value at one point, before a partial bounce-back to a recent
23% net loss.
Prices might have stayed down or dropped further still if not for ongoing concerns about the
proportion of higher quality milling wheat in this year’s mix. Wet harvest weather has lowered
protein content of US hard red winter bread wheat – its main export grade. Excessive rain is
also said to be causing some problems with vomitoxin and low proteins in Canada. French
wheat quality has been badly hit by the rains and floods that plagued its crop before and during
the harvest, affecting Hagberg falling numbers and other milling characteristics, if having less
dramatic impact on proteins, which should at least help disposal into feed outlets. German and
Baltic EU States have also encountered some problems with rain compromising harvest quality
while parts of Russia and Ukraine have seen similar weather problems. Russia’s crop is so large,
that its smaller proportion of milling wheat to feed may still exceed last year’s volume. Down
South, the Australian wheat crop, still a month or so away from harvest as we go to press, is said
to suffering some rain damage in New South Wales, its second most important exporting state.
This litany of crop problems is being reflected in larger than
usual premiums for better quality milling wheats over middling/
lower grades. Yet, such has been the descent in the market as a
whole, that even with that increment, some of the top wheats are
still trading at cheaper than usual levels.
In the USA, for example Dark Northern Spring wheat was
MARKETS OUTLOOK
by John Buckley

2. offered export (fob) terms for nearby shipments from $264 down
to $247 per tonnes last month – much the same as at this time last
year and far cheaper than in the autumn of 2014. But that’s a full
$50 premium over better quality (12.5% protein) Hard Red Winter
wheat which is itself trading a massive $37 over ordinary HRWs
(compared with a $10 differential this time last year). The higher
volume of lower quality HRW is meanwhile putting it at a discount
to usually cheaper soft red winter wheat on fob export markets.
This wider than usual quality split and the ensuing price
differential is likely to result in far larger than usual supplies of
wheat offered to the feed sector in direct competition with maize
and other coarse grains – in the US, in Europe and on the world’s
export markets – especially in Asia, where buyers can be sensitive
to relative wheat/maize pricing.
In the months ahead, these three factors will be key drivers
of the wheat price: massive supplies overall, heavy export
competition and relatively tighter availability of higher quality
wheats. How all this will pan out in terms of ‘average’ wheat
prices is uncertain. But for the time being, the quality premium
clearly looks likely to stick, if not expand further as buyers try to
get their hands on the best grade supplies first, keeping abundant
lower grade wheat prices under downward pressure.
Even more maize
IT has been a switchback year for the world maize market.
Prices initially rose quite sharply amid constantly sliding
estimates for a drought-reduced Brazilian crop – the world’s
second largest export source after the USA. US markets were also
supported by talk of the La Nina weather phenomenon (the flip
side of last year’s ‘El Nino’) bringing a hot, dry damaging US
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Milling and Grain - October 2016 | 73

3. summer. Brazilian prices firmed further as its currency revived
from record lows against the US$ (in which most grain is traded)
but by then, it had oversold its short crop (cashing in on earlier
currency weakness). With floods delaying the Argentine harvest
and Europe east and west more or less sold out after last year’s
poor EU/CIS harvests, that left the export floor clear for US corn
suppliers to sell far more than they had earlier expected.
For a while, that export bonanza appeared to be propping up
the US market, and in turn global and European maize prices.
However, in the past couple of months, mostly ideal US weather
has seen yield estimates start to rise and on top of an upward
adjustment in the USDA’s official planted acreage forecast, this
has led to US production numbers rising from 366.5m to 383m,
versus last year’s 345.5m tonne crop.
Over that same period, Brazil’s current (2015/16) crop forecast
has been eroded by a further 3 tonnes, putting it 18m tonnes or
more than 20% down on the previous
year’s. But assuming a return to normal
weather there compliments planned
higher plantings, that should bounce
back by an estimated 15.5m tonnes
next spring. The EU’s 2016 corn crop
has meanwhile been cut by a further
3m tonnes (and may have further to fall
as the main, French component still
seems to be contracting). However,
Argentina’s 2016/17 crop has been
revised up by 2.5m to 36.5m tonnes.
Overall, world maize production is
now expected to reach around 1,027m
tonnes – a new record high, 15m tonnes
over the mid-summer figure and a
staggering 68m tonnes bigger than last
year’s crop.
As in the wheat market, big supplies
and low prices are expected to boost
maize consumption which the USDA
sees growing from about 959m to
1,016m tonnes. The lion’s share of that
usage gain is in the US itself, expected
to consume an extra 11.4m tonnes in
animal feeds another 2m more than last
year in food/industrial outlets. China will also boost demand
by 8.5m tonnes as it auctions off its massive reserves of maize
from past surplus crops. Some analysts think it might use far
more than that as it offers new subsidies to its processors in an
attempt to clear more of this surplus (which currently accounts
for almost half the world stocks of maize). A number of smaller
demand increases are also expected in the EU (+2m) and in CIS,
Asian and Latin American countries.
Despite that, the maize market will remain in surplus, adding
at least 10m tonnes to its already large global stockpile (forecast
219.5m tonnes). The lion’s share of that stock increase will take
place within the USA (+17m tonnes) leaving stocks there at
levels not seen for decades and equal to about 19% of usage or
almost 10 weeks’ supply.
As the sheer size of the coming US crop sunk in, CBOT
futures prices embarked on a renewed slump, recently hitting
a seven year low of about $3/bu in
August (about $118/tonne). As in the
wheat market these prices were almost
a third cheaper than their 2016 peaks
(around $173) before coming back to
the $3.40s (about 22% down) in mid-
September..
The decline in US wheat and maize
prices has inevitably reduced the value
of grain in Europe, although so far,
not to the same extent. Prices here
have been propped up by the shock of
the French and other crop shortfalls
and concerns about the downturn in
quality, by the weak euro and by ideas
that, even in a year of expected intense
competition from the CIS countries -
probably the US, Canada and Australia
too - the EU will be able to dispose of
enough of its exportable surpluses to
avoid building further stocks (indeed
for both wheat and maize, EU ending
stocks should end 2016/17 quite a bit
below last season’s high levels).
While world barley output is seen
slightly lower this season, that
Main wheat crop estimate changes since mid-year
(mn tonnes – source USDA/Milling)
June Sep Last season
EU 157.5 145.3 160
Russia 64 72 61
USA 56.5 63.2 55.8
Canada 28.5 30.5 27.6
Australia 25 27.5 24.5
Ukraine 24 27 27.2
WORLD 731 745 735
Changes to world maize supply since mid-year
(mn tonnes – source USDA/Milling)
June Sep Last season
USA 366.5 383.4 345.5
Brazil 82 82.5 67
EU 64.3 61.1 59.1
Argentina 34 36.5 28
Ukraine 26 26 23.3
Russia 14 13 13.1
WORLD 1,012 1,027 959
74 | October 2016 - Milling and Grain

5. 76 | October 2016 - Milling and Grain
is more than offset by larger crops of sorghum, oats and rye,
indicating total coarse grain production of 1,320m tonnes – about
72m more than last year. Along with the competition from cheap
feed wheat, this suggests the feed sector will have to remain
clearance-priced in the season ahead – good news for livestock
producers’ input costs.
Proteins
The oilmeal sector has come under renewed pressure in the past
month from a record US soyabean crop, pushing down the cost
of beans on the bellwether Chicago futures market by about 20%
recently. In its August supply/demand forecasts, the US government
raised its yield forecast from 48.9 to a record 50.6 bu/acre (+5.4%
on the year) which in combination with its earlier raised estimate for
harvested acres, projects a crop of 114.3m tonnes. That’s 11m tonnes
more than expected mid-summer, easily covering earlier reductions
of about 6m tonnes made to weather-hit South American bean crops.
It means that, even with strong exports, the US remains in
soyabean surplus, expected to build ‘carryover’ stocks to about 10m
tonnes over the coming season, compared with starting stocks of
5.3m and just 2.5m only two years ago.
Good supplies of soya are expected to continue well into 2016/17
as Brazil (just about to start planting) hopes for more normal weather
to deliver its first 100m tonne-plus crop next spring of 2017. Some
observers believe the Latin American soya expansion will slow down
from now on as farmers there switch land back to maize. Corn is
fetching much higher prices in Brazil after this year’s crop shortfall
and in Argentina, soya (unlike maize) still incurs a hefty export
tax. However, given normal sowing and growing weather, Lat-Am
soya production should still increase by about 3% for the year ahead
at least. In the US, the reverse equation – weaker maize than soya
prices - is favouring even larger soya sowings next year, likely
to keep prices well under control (again given the usual caveat of
‘normal’ weather).
The bottom line is that soya will provide a larger share of world
total meal consumption in 2016/17 for the second year running –
about 71% compared with 67% of recent previous years. Rapeseed
meal, which had previously seen strong growth of supply and
demand, has backtracked with two years of falling crops and
production but will be replaced this season with record large supplies
of sunflower meal – up by about 10% from last year and as much as
27% higher than four years ago – though still only providing about
5.5% of world total protein meal consumption.
Sunflower supplies are being boosted by bigger crops in Russia,
Ukraine, Argentina and in Europe itself. Sowings have gone up
in the former Soviet countries and in Latin America in response
to better returns from growing the crop, boosted by demand for
sunflower oil, the main crush product.
Rapeseed meal production has been reduced by smaller crops
in Europe and Ukraine to a four-year low although largest single-
country producer Canada is at least expecting a big crop for a second
year running. Most of the decline in global rapeseed consumption
will be within Europe where it will be replaced by sunflower meal
and soya meal.
The big soya crop should also continue to keep down prices of the
other oilseed meals, most of which are less valuable than soya in
terms of protein content and other quality parameters.
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6. Milling and Grain - October 2016 | 77
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