IT WAS a pretty explosive chapter in global grain markets last week, sparked by the release of the latest USDA worldwide supply-and-demand numbers on Tuesday but then fuelled by talk of higher Russian wheat export taxes and the ongoing dryness in South America which is raising row-crop production concerns for Brazil and Argentina. The markets may have traded sideways leading into the release of the January World Agricultural Supply and Demand Estimates (WASDE), but the screens very quickly turned to a sea of green with bullish news across the board sending futures market participants into a buying frenzy.
Perhaps the biggest surprise was corn. The USDA made a small cut to US opening stocks for the 2020-21 season, but they took a scythe to the average corn yield for the recently completed harvest, slashing it from 11.035 tonnes per hectare (t/ha) in November’s estimate to 10.795t/ha this month. A yield decrease of 0.24t/ha may not seem a lot, but it is actually the biggest ever November-to-December drop in US corn yield. And when it is spread over 33.4 million harvested hectares, it equates to an 8.2 million tonnes (Mt) decrease in US production.
Add very conservative production decreases of 1.5Mt and 1Mt in Argentina and Brazil respectively, and small increases to Chinese and Indian output, and global production in 2020-21 is suddenly down by 9.7Mt. Of course, with lower production comes the need to ration demand, and the USDA made random cuts to the US, Mexican, EU, North African and Asian requirements, seemingly just to make the balance sheet balance. The questionable decline in demand, in turn, led to lower world imports and thereby lower global exports. The interesting thing here was almost the entire reduction in exports was taken out of the US, which currently has the cheapest corn in the world and whose export pace is running at record highs.
How quickly things can change. Back in June, forecasts for US ending stocks for the 20-21 season peaked at an extremely bearish 84.4Mt. What was the US going to do with all of that corn? Wind the clock forward seven months and the forecast for US ending stocks has more than halved, to 39.4Mt, and most in the trade expect it to be lower again next month. The USDA still has some work to do on the Chinese corn numbers as the current pace of vessel arrivals, plus forward purchases, suggests that imports will be well above the USDA’s number of 17.5Mt.
On the soybean front, the USDA lowered global production by 3Mt. Output in the US was reduced by 1Mt, the Argentinian crop was cut by 2Mt, but the USDA buried its head in the sand with regards to Brazil, leaving the crop unchanged at 133Mt. Some private forecasters have that number as low as 128Mt with a downward bias. The pace of exports, primarily on the back of Chinese demand, means the US balance sheet is exceptionally tight.
The US will be running on fumes by the end of the 2020/21 season with the forecast carry out of 3.8Mt, equal to just 23 days of crush demand. This dramatically increases the importance of South American production, as there is almost zero ability for the US to cover any loss in production south of the equator.
China’s imports were left unchanged at 100Mt, despite the current pace suggesting it should be around 4Mt higher. This allowed the USDA to add only 800,000t to US exports, even though current shipping and sales data argue for a significantly higher figure. But with fumes to play with, how does the USDA increase US exports?
Wheat swept along
The wheat argument on its own is not a wildly bullish story at the moment but when you add the tightening corn scenario and the Russian political intervention, it is difficult to see too much downside in the short term. While still a record, the USDA reduced global production by 1Mt to 772.64Mt. Among the major exporters, Argentine output was cut by 500,000t to 17.5Mt, Russian production was increased by 1.3Mt to a record 85.3Mt, despite the dryness suffered in the southern regions during the season. The big surprise was leaving Australia untouched at 30Mt, despite some local analysts now having the crop at 35Mt, or even higher.
In terms of world trade, exports out of Argentina were reduced by 500,000t to 12Mt on the back of lower production, and Russian exports were decreased by 1Mt to 39Mt, which seems quite a benevolent response to the export tax situation. Partially offsetting these declines was 500,000t added to both the Canadian and EU export numbers.
On Friday, Russia’s economy minister announced that the government would adopt a recommendation by a tariff subcommittee to double the proposed wheat export tax from 1 March 1 to 30 June. The tax will commence as planned on 15 February at €25/t (AU$41.50/t) and then rise to €50 ($83/t) on 1 March. In addition, the government will also introduce a barley and corn export tax of €10/t ($16.60/t) and €25/t ($41.50) respectively commencing on 15 March. The Russian Government has also stated the export taxes are likely to remain in place beyond 30 June but under a formula-based system that was set by government decree back in August 2013 and never cancelled. This mechanism was last used in 2016 but it was zeroed on 23 September that year and has been running at that level ever since.
In late December. leading agriculture consultancy SovEcon reduced its Russian wheat export forecast by 4.5Mt to 36.3Mt on the expectation that farmers would delay sales until July 2021, when the export quota and tax programs expired. With the prospect of the tax continuing into the new season, SovEcon is now saying that exports could be as high as 37-38Mt, as extending the tax has removed the incentive for growers to carry the grain into new crop. Their propensity to sell will also be shaped by the condition of the new crop when it emerges from dormancy in spring.
Russian tax pushes export price
This news magnifies the importance and ramifications for global wheat tenders, most notably from Egypt (GASC) which we saw first-hand last week. Last Monday GASC announced a tender for shipment between 18 February and 5 March shipment. It passed after only receiving four offers. The lowest was Romanian at US$292.97/t free on board (FOB), followed by two French offers. The fourth offer was Russian origin, but it was well off the pace at $315/t FOB. To put this in perspective, the last time GASC tendered for wheat on 15 December the lowest FOB offer was Romanian wheat at $270.96/t. The lowest Russian offer was $285/t FOB, which means that Russian export prices have rallied $30/t in less than one month. Effectively, the tax has increased export values rather than reducing domestic prices.
What will happen to offers when the revised export tax and quota programs take effect in February and March? Keep in mind: Since 1 July, GASC has bought roughly 4Mt of wheat, and it is expected to buy another 3.5Mt or so by the end of June. EU inventories are tight on the back of a smaller crop and unprecedented Chinese demand, which is likely to keep prices high. This is likely to push global demand to the US (supportive of futures), Canada and Australia in coming months and potentially into the third-quarter new-crop Black Sea slot.