Markets

Will low prices cure low prices?

Peter McMeekin, Nidera Australia origination manager, January 17, 2017

One of the bigger talking points from last week was the apparent reaction of United States farmers to lower world wheat prices.

According to the US Department of Agriculture, winter wheat plantings have been slashed to their lowest level since 1909, and represent the second lowest planted area since records began.

Nidera Australia, Peter McMeekin

Nidera Australia’s Peter McMeekin

In the USDA report released late last week, the area sown to winter wheat was pegged at 32.383 million acres (13.10m ha). This is a decrease of 1.52m ha and is down around 10 percent on the previous year. Analysts had anticipated a far more conservative reaction by the US farmer, expecting plantings to be around 34.14 13.82m ha.

The biggest change was seen in the Hard Red Winter (HRW) wheat area, which was down 12pc year-on-year. The largest declines were across the Great Plains, which spans the centre of the US from North Dakota and Montana in the north to Texas in the south. In comparison, the  Soft Red Winter (SRW) wheat seeded area was down only 6pc .

The CBOT futures market reacted by posting a moderate 7 ¼ cent/bushel gain in March contract in the following trading session. However, this is certainly not a game-changer from a global perspective. It will undoubtedly tighten up the supply of US wheat over the coming season, but world supplies are still at record highs providing a buffer to the expected lower US production.

Additionally, the US decrease does not appear to have been replicated in other major production regions across the northern hemisphere. Early seeding forecasts suggest that the European Union grain growers have planted a similar area to cereals as last year and production is expected to increase in 2017/18, following the volume and quality issues that plagued the wet 2016 European harvest.

“Grain growers across the globe are getting better at growing grain”

In Russia, current estimates are putting the 2017 harvest at a record 117 million tonnes. In just 15 years, Russia has gone from a net importer of grains to one of the world’s biggest exporters. The first reason for this is that the costs of production are significantly lower in Russia compared to many competing exporters, due mainly to the lower cost and abundance of arable land.

The second reason is Russia’s proximity to Egypt and Turkey, two of the biggest wheat importers in the world. Most of the export grain is produced in the southern regions of Russia with a relatively short and inexpensive haul to the major Black Sea ports. The export drive is also being supported by Government construction of up country storage facilities and export capacity that will further enhance competitiveness into the export market.

The world has now produced record wheat crops four years in row. Grain growers across the globe are getting better at growing grain. The decrease in US plantings is not the catalyst we need to push prices higher. Sure, it may put a floor under prices for the time being, but it will be major production issues in one or more of the key producers that will be required to drastically change the current low price regime.

 

Source: Nidera weekly market report

 

 

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