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Global production risks ahead

Luke Mason, May 15, 2018

MAY, JUNE and July are generally the critical months for northern-hemisphere cereals and row-crops.  The seasonal risks facing the global grains market this year, however, take on more importance than previous years due to a forecast general tightening in worldwide corn and wheat stocks on top of problems already experienced in Brazil and Argentina that have taken the total South American corn crop down 20 million tonnes (Mt) from earlier predictions.

EU and Black Sea wheat and barley crops are entering the most critical part of the growing season in the next month. In general, it will be challenging to repeat the excellent conditions experienced last year in Russia which led to record wheat production, and crop forecasts are generally around 8-12Mt lower than last year. The remarkable thing is that Russia has disposed of its current-season wheat very efficiently, with exports likely to almost reach a record 40Mt by end July. This is up by a significant amount from the previous year’s record high at the time of 27Mt.

For next season, Russia is still forecast to have its second-highest crop and second-highest exports on record in the 2018/19 season, but we are still around six weeks away from being able to determine the final crop size. There has been recent dryness over April and early May, but forecasts for rainfall are starting to look better on top of recent rain in some areas. Ultimately, the Black Sea region, and Russia in particular, seem very likely to be drawing down wheat stocks in 2018/19 reasonably significantly.

Over to North America, and the US Hard Red Winter (HRW) wheat crop is in worse condition relative to the five-year average. The problems in HRW are documented, but despite a drawdown in 2018/19 ending stocks, US supplies remain adequate in the absence of needing to fill export demand for crop problems elsewhere. Spring wheat in the US is currently slow to get planted, while in Canada, conditions are dry in Manitoba and parts of Saskatchewan, with warmer and drier weather expected over coming months.

USDA’s 10 May World Agricultural Supply and Demand Estimates report  was the first for the 2018/19 season, and confirmed the tightening grain carry-out stocks for the year, not only for US wheat and corn but for global balance sheets as well. While there is still a long growing season ahead, it’s hard to see any 2018-19 upside production surprises that could pull carry-outs back up to or above 2017-18 levels.

If these forecasts are confirmed over the next few months, it will justify to buyers and farmers why prices have recently moved higher.

Finally, if production comes in below these levels, we quickly get stocks down to levels where we change consumption/feeding patterns, or even ration some demand seasonally.

For Australian producers, all the above should see a supportive tone to values at least for the next 3-4 months. We would continue to see potentially higher values if we were to see crop problems develop in any of the countries which are major producers of corn or wheat. Weather forecasts and observations face increased scrutiny and dependence, and will consequently impact prices and volatility more than they have in almost five years.

This week’s COFCO International Weekly Market Report is by wheat trader Luke Mason.

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