Frontrunner

Please note, in this audio report China was reported to have purchased three million tonnes of US supplies during the week commencing the 15th March 2021. Following the release of this recording, China purchased a further 800,000 tonnes.

World wheat markets have slipped 2-3% lower this week following better than expected wheat crop estimates from analysts for many of the world’s primary wheat exporters: the US, Russia, Ukraine, and the EU.

Much of the US wheat belt has stayed dry for several months but recent snow and rain has proved beneficial. Weekly crop ratings were ‘good’ to ‘excellent’ for both Oklahoma and Kansas which were up four points to 57% and two points to 38% respectively. More rain is due with significant storms forecast to arrive.

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Earlier this week, the United States Department of Agriculture (USDA) published its March World Agricultural Supply and Demand Estimates (WASDE) report. Speculative traders holding significant long positions in US grain futures were hoping for a helping hand to support their bullish view but were left disappointed.

It was expected that the USDA would lower its corn production estimates for Argentina and Brazil following dry weather in Argentina and excessive rainfall in Brazil. The wet conditions in Brazil have delayed soybean harvest and consequently delayed planting corn crops at the optimum time. However, the USDA made no changes to these estimates.

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World wheat markets have slipped this week. A lack of fresh bullish features has led to spells of profit taking from speculative buyers who still carry significant long positions in grain futures markets. US weekly wheat export shipments and sales were particularly disappointing. However, the weekly export pace from the EU was far more encouraging. Wheat shipments for last week were one million tonnes, taking the total now shipped to over 17.5 million tonnes.

Analysts estimate the EU, including the UK, will ship just over 26 million tonnes. This will leave end June stocks extremely tight at around ten million tonnes. Last season from the beginning of March to the end of June, the EU shipped over 13 million tonnes during a period when there were no Russian export taxes and therefore stronger competition. However, this week, the world’s major importers, Egypt, Algeria and Saudi Arabia, have again been absent from the market, leading to concerns for export demand for the remainder of the season and adding to market weakness. Remaining old crop supplies may be tight but carry a $40-50/t price premium to new crop. Perhaps importers will target cheaper new crop supplies if they have sufficient stocks to wait until they are available.

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The Agriculture and Horticulture Development Board (AHDB) updated estimates for the current season's UK wheat balance sheet this week, highlighting a huge two-million-tonne cut in domestic wheat consumption. Demand in the human and industrial sectors is now seen at 6.438 million tonnes; almost half a million tonnes lower than last season.

This is primarily due to loss of demand for biofuel and starch following the closure of the Roquette plant in Corby in December. Miller demand is also lower as a result of the impact of the coronavirus and subsequent lockdowns.

The biggest drop in wheat use, however, is within the animal feed sector where year-on-year demand will be over 1.5 million tonnes lower. Feed barley has been heavily discounted to wheat by as much as £50/t, resulting in wheat being displaced in the feed ration. Wheat imports are seen doubling on the year to 2.1 million tonnes, but the small 2020 wheat harvest - just 9.658 million tonnes - leaves total supply five million tonnes down on the year. This also results in an exceptionally tight supply situation ahead of the 2021 wheat harvest. Old crop wheat prices look set to continue to reflect import costs.

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A period of extreme cold has affected the primary US winter wheat producing states in recent days. Temperatures nearing record lows of between -15-20°c have been recorded as far south as Texas and concerns that wheat crops will be subject to winter kill has triggered volatile trading in Chicago Board of Trade (CBOT) wheat futures. Prices rallied to their highest since the end of January as the chief meteorologist of the United States Department of Agriculture (USDA) suggested crops in Texas and Oklahoma had been lost to the severe cold.

This week at its Annual Outlook Forum, the USDA said that it expects to see a record combined area of US corn and soybeans of 182 million acres. US farmers, encouraged by seven-and-a-half-year high prices will increase their corn planted area to 92 million acres this spring, compared to 90.8 million acres last year. The US is the world’s leading corn exporter and this season will see its shipments rising by 21 million tonnes on the previous year to 66 million tonnes. This is helping to meet increasing demand to China where corn imports will rise to 24 million tonnes, which is over 17 million tonnes up on the year.

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The United States Department of Agriculture (USDA) published its February World Agricultural Supply and Demand Estimates (WASDE) report on Tuesday this week, which many traders expected to present a very bullish picture for world grains, particularly corn.

Last week’s record US corn sales to China coupled with adverse South American weather over the past month, which has impacted on corn production prospects for Argentina and Brazil, encouraged further buying. Prior to the publication of the WASDE report, these circumstances had taken US Chicago Board of Trade (CBOT) corn futures to new contract highs; the highest for 7.5 years.

However, the USDA presented data which failed to meet the bullish trader expectations and triggered a spell of notable long liquidation in corn and wheat futures markets. It is estimated the speculative funds sold 55,000 CBOT corn contracts, representing 15% of their long position and values 10% below their Tuesday high.

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Last week’s Frontrunner reported China making significant purchases of US corn. China bought over six million tonnes, which helped take total US weekly corn export sales to 7.44 million tonnes for the period up to the 28th January. This is a record high, doubling the previous weekly high set back in 2012.

The United States Department of Agriculture (USDA) estimates that US 2020-21 exports will reach 64.77 million tonnes, which will leave US ending stocks nine million tonnes down on the year at 39.42 million tonnes.

However, the US has now sold 87% of this estimated available surplus with seven months of the season to go and with the next crop still sitting in the seed bag. Adding to this bullish situation are reduced corn production estimates from South America. Adverse weather has led the Buenos Aires Grain Exchange to lower estimates for Argentina by one million tonnes to a new total of 46 million tonnes. 

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Early this week, world wheat futures markets continued to be pressured by speculative long holder selling. Losses extending from the contract highs reached last week have resulted in futures markets losing almost all the price gains they had made since the start of January. Losses for London wheat futures were almost £15/t. However, further political intervention that will disrupt grain flows partnered with soaring Chinese import demand helped generate a rally from the lows. This highlighted how market price volatility may be expected to continue.

The Russian government formally approved its proposed €50/t wheat export tax which will come into effect from 1st March and run to 30th June 2021. It remains unclear what the exact impact of these taxes will be, but restricting grain flows from the world’s leading wheat exporter can only support prices in the short-term. Russian officials have confirmed they will continue taxing wheat exports from 1st July but, instead of the fixed rate, a formula will be used to calculate exact amounts. Meanwhile, disruptive weather is preventing 70 vessels from loading at the port of Azov, resulting in 20km queues of lorries waiting to tip.

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US wheat futures peaked last Friday, ending the 30% price rally that began last August. Futures markets had become technically overbought and were due a correction. US markets were closed for a public holiday on Monday but Chicago Board of Trade (CBOT) wheat futures subsequently posted four consecutive days of losses. London wheat futures peaked on Monday, setting a contract high price that hasn’t been seen since January 2013 before following US markets lower during the week.

One of the primary world price drivers has been increasing concerns for the availability of wheat supplies as Russia looks set to levy an increased tax for its wheat exports. It is proposed that from 1st March, any wheat shipments from the world’s leading wheat exporter would incur a €50/t tax. If this is realised, it would cause considerable disruption to normal grain flows. Later in the week, trade rumours suggested that Russia may instead employ a floating tax on its wheat exports, which analysts believe may help reduce prices. This uncertainty galvanised selling pressure.

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Few World Agricultural Supply and Demand Estimate (WASDE) reports from the United States Department of Agriculture (USDA) trigger a market reaction such as the reaction triggered by the report released earlier this week. A report with such futures volatility following a period of prolonged market price gains hasn’t been seen since 2012/13.

Chicago Board of Trade (CBOT) corn and wheat futures rallied by almost 5% whilst both Paris and London wheat futures hit new contract highs for old and new crop markets. Sterling strength against the euro tempered the UK price rally to a degree, but May 2021 London wheat futures climbed to their highest level since January 2013.

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