MARKETS OUTLOOK

Are the markets finally bottoming out?

by John Buckley

As Canadian
planting approaches,
the government has
offered a preliminary
crop estimate of
approximately four
percent or 700,000
tonnes below the
17.2million tonnes
that it estimated for
2015. The EU crop
outlook this year is
still seen, at best
close to, maybe a
little less than last
years 21.4million
tonnes (although one
forecaster has it at
20.4m).

Prices on the benchmark grain and feed ingredient markets had been eroding further since
our last review, several reaching new five and a to six-year lows. But the latest descent was
much more gradual than in recent months and by mid-March, market leaders wheat, maize and
soyabeans had all begun to show signs of bottoming out. The leading Chicago wheat futures
market even recorded its biggest rally in months. Although its European grain counterparts have
been slower to follow.
Interestingly, some of the broader agri-business sectors have also shown some nascent signs
of recovery, spilling a bit more confidence into the sector as a whole. Shares were reported to be
moving up for the top seed producer Monsanto (recording its biggest weekly rally since 2012)
while those of largest US meat handler (Tyson) and fertiliser supplier CF Industries also rose,
Tyson actually setting a record high.
However, one swallow does not make a summer, nor does one good week in the markets mean
things are on the turn. The rally has to show it has staying power. Even then, there is no evidence
yet of a runaway market in the making to gainsay the opinion expressed in our last review, that
2016 was likely to shape up as another year of cheap grain and feed input costs.
Supporting that theme has been the European Commissions own preliminary view of the
coming years cereal outlook in Europe. Thats headlined by the forecast of another big wheat
crop; perhaps five percent down on last years, but still well above the long-term average, a
similar barley crop to last years and a big rebound in maize production. Amid huge world stocks
of the top traded cereal crops, and assuming no drastic weather upsets in the growing season
ahead. The Commission sees no reason for higher prices in the year ahead; which raises the
question whether these are the type of prices that crop farmers might have to get used to for a
longer haul.
Its all so contrary to what we were led to expect a few years back when the big financial
institutions jumped into farm and other commodities around the time of the global financial
crash. As stock markets melted down, speculators then were looking for investment pastures new
and, along with the US dollar and gold, commodities found themselves playing the role of safe
haven for hot money.
At the same time, a series of crop failures in regions led by the former USSR helped a host of
pundits dust off old theories about the world running out of raw materials. As consumers, we
were told we would have to get used to more expensive commodities as the new normal. How
wrong that turned out to be. Crops rebounded, supplies did keep up and demand growth slowed
in China and other pace-setting economies.
Like that story, the bear market in crop commodities of the past two or three years has
probably got a bit overdone, some commodities maybe oversold. There is also the increasingly
heard, and justified refrain, that farmers growing grains and oilseeds have to make a living too.
Its in no consumers long-term interest if they react to loss-making prices by cutting output.
So what has changed among the fundamentals since our last issue to promote a firmer trend in
the crop futures markets? The answer is, not much.
For a start, world wheat production for the current season is estimated about 3m tonnes lower
than in January, thanks to mainly to smaller crop forecasts for India and Australia. But the US
Agriculture Departments monthly forecasts have also cut consumption by a far larger seven
million tonnes, mainly due to two years of downward revisions to estimates of wheat use in
China the worlds largest single country consumer.
Since Chinas tightly controlled grain systems are considered largely off-market these changes
are not overtly bearish for the international wheat market. Neither is the 5.5million tonnes the
USDA has been able to add to is estimate of the global wheat stockpile in the past month or
two. The resultant 238million tonnes supply cushion is currently massive, and the largest ever;

86 | April 2016 - Milling and Grain

with well over a third of that surplus is held within China. The
useable quality of that grain is unknown probably closer to
low grade feed than milling, as evidenced by the fact that China
continues to import higher grade food wheat to beef up its flour
quality.
The impact on the broader market of a 2.4million tonne
reduction in Indias wheat crop forecast (to around 86.5million
tonnes) is similarly muted by the fact that India holds very large
stocks too about 17million tonnes at the start of this season.
It too is making some higher grade wheat import purchases to
improve its flour quality after last years harvest was damaged
by rain. Some sources think Indias next crop could be as low as
82million tonnes but, so far, this is not emerging as a significant
bullish factor for world wheat prices either. The same applies to
USDAs forecast for Australias crop, going down by 1.5million
tonnes to 24.5million. Its still a normal harvest for Australia
which shouldnt cramp its exports too much and is, in any case,
close to trade forecasts made earlier in the year.
We have to keep an eye on one or two ongoing weather issues
that might excite the speculators (the managed funds have been

holding a record short position in the Chicago market, bets on

prices falling rather than rising). Within the USA itself, the soft
red winter wheat crop, the basis of the trend-setting Chicago
futures contract, has been exposed to some flooding that could
trim output. The USAs main exportable bread-wheat crop, hard
red winter wheat (not long ago the worlds largest single wheat
export component) has meanwhile come out of dormancy weeks
before normal amid unusually mild weather. That could mean
tender new growth exposed to late frosts or dry weather that
seems to have set in recently.
That said, the general condition of the US winter wheat crop
is better than last years in some states its best for many years.
True, the USDA expects the US to end up sowing (including
not-yet-planted spring wheat) and producing slightly less wheat in
total than last year. However, the US is also expected to need less
wheat in 2016/17 season as its exporters come under increasing
competition from other supplying countries. As a result, it should
still end up with even larger stocks than it starts with. These are
already seen at a multi-year high of 26.3million tonnes; almost
half as big as its last crop!

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to show Chicago wheat about 7.6 percent dearer at end-2016 than

now. If we go as far forward as December 2017, the difference
is more like 14 percent. In Europe, the Paris milling wheat
futures market suggests the incredibly weak spot prices weve
seen recently (as low as the 140s per tonne) could recover to
as much as 176.50 by May next year and 186 by September
2018. But this is all highly speculative and it would probably
need a crop upset or two among major suppliers to begin to realise
those prices.

In Canada, the preliminary government forecast has the 2016

wheat crop at 29.2million tonnes against last years 27.6million
and in line with the 2015 result. There is some mild unease
about dry weather at planting time (starting early this year amid
warmer than normal conditions) so this situation will also need
monitoring.
In the up and coming CIS wheat exporting countries, Ukraines
crop has seen some improvement after a poor start to its sowing/
growing season last autumn but is still expected to lose about
20-30million of its winter wheat this summer a loss that spring
sowings will not make up. Russias crop is doing well, though,
and should be similar to last years.
The Russian rouble has firmed up a bit recently and that has
stopped its export prices falling for now. However, the overall
contribution from the CIS (including Kazakhstan) is expected to
remain ample enough to keep these countries in the van of export
competition next season if a bit less pressing for sales at the
cheapest end of the export market.
The next EU wheat crop is meanwhile seen by the Commission
and private an analysts about 3-5million down on the year. But
Europe also goes into 2016/17 with huge stocks of 13.7million
tonnes. Amid slowing export trade and only small gains in feed
use (due to an expected recovery in the EU corn crop), analysts
currently see the EUs wheat surplus swelling even more,
exceeding 20million tonnes by the close of 2016/17.
International wheat prices, to which the EU market is fairly
closely linked nowadays, are also made by the level of demand
from importers what they can and are willing to pay. In this
current season of slow consumption growth, imports which
make up about 23 percent of demand are not seen increasing
much.
Apart from the key EU customer Morocco, there are no
big headline orders from countries with failing domestic
crops. Many of the routine buyers are struggling to find the
finance needed to pay even for historically cheap wheat
in increasingly expensive US dollars the currency of most
international commodity trade. Some like Egypt and Syria also
have chronic financing problems caused by their weak economies
and currencies.
Looking to the futures markets for price direction, these continue

88 | April 2016 - Milling and Grain

Maize & other coarse grains

Maize prices have also been coming off their lows recently,
despite markets now moving seasonally into the peak selling/
shipping season for the top suppliers, (The USA) main Latin
American competitors.
Since our last review, the USDA has raised its estimate for
Brazilian output from 81.5million to 84million tonnes, Argentinas
from 25.6million to 27million. South Africas crop is tumbling
with drought now seen at 6.5million tonnes almost halving the
December forecast but this is more of a local/regional issue as the
country has not been a major exporter for some years though
it will need to import from outside Africa. The same applies to
another large maize producer, India, whose recent 21million crop
estimate looks vulnerable after a sub-par Monsoon.
It may export less and import some but will not be a big factor
on the world market. Due to the South American increases,
overall, world maize output is now seen about 1.7million tonnes
higher than in January, consumption about 1million tonnes bigger
too, leaving world stocks about 2million tonnes lower but still
very large at some 207million tonnes.
World maize trade is seen about 4million tonnes higher than in
January and about the same amount over last seasons due to the
unusual South African imports and a number of smaller/moderate
sized consumers taking a bit more at these still cheap prices.
Early pointers to the 2016/17 season that starts in September
are led by forecasts of a larger than expected US planted area and
probable rebounds, largely yield-based, in EU and CIS production
(assuming no repeat of last years droughts and heatwaves across
Europe East and West).
The first outlook from the USDA Outlook Forum conference
has US corn sowings at 90million acres 2million more than last
year, despite a lot of trade talk about farmers deserting the crop in
a move to more lucrative soyabeans. That might still happen and
traders will be keenly watching the annual March 30th Farmer
Planting Intentions Report for any contrary view. (The latter
is seen as more accurate as it will be survey-based rather than
extrapolated guesswork by the USDAs economists as used for the
Outlook Forum).
However, as always, the weather will have the final say. If it gets
wet and planting is delayed, acreage starts to shift to soyabeans,
which can be sown later. Although some early maize planting has
already started in southern US states, relative corn and soya prices
between now and planting time further North can also influence
final farmer decisions.
Assuming normal yield around 168 bu/acre, the Outlook projects
a possible 351m tonne US maize crop for 2016. Overall that
would put US supplies at a twelve-year high as the crop again
outstrips foreseen demand, leaving high carryover stocks no
basis for any steep rally in US prices unless something goes badly

wrong with its competitors crops in the Northern Hemisphere.

At this early stage, the Commission has offered a preliminary
EU maize crop estimate up 16percent or about 9million tonnes
on-year at 67.3million. That would still require quite substantial
imports from outside the Union but probably less than this
seasons unusually high 16m (these almost doubled after the
EUs 2015 crop shortfall). Russias farm ministry has meanwhile
estimated a seven percent rise in its corn area to record 3million
hectares, having already doubled its production and exports in
recent years.
The extent of Ukraines crop comeback will probably depend
more on returning yields to normal from last years droughtreduced levels as a lot of the extra land available (from failed
winter wheat crops) is seen going to sunflowers.
Overall, the global 2016 crop outlook looks adequate for maize,
if weather co-operates. Even if crops underperform a bit, the
larger carryover stock can supplement supplies without these
getting tight at the end of the 2016/17 season.
As we go to press, the futures markets point to end-year maize
prices about five percent higher than they are now, end 2017 about
seven percent more and end-2018 (highly speculative again) about
ten percent over the current spot market. However, we should
also note that the managed money (for which read funds and
speculators) have recently been holding record short (sold) bets
on maize futures. While that may expose them to any unforeseen
weather upsets/price rallies, it does not express much confidence
in the prices above revealed by the forward futures curve.

The European Commission also offered an early barley crop

forecast of 61.5million tonnes versus last years 61.3million.
Acreage has held up with prices after good clearances into
exports currently well ahead of the previous seasons, thanks to
unusually large demand from China.
Soya & other oilmeals
Soya drives the oilmeal comlex and the US still just about leads
the soya market. The USDA Outlook Forums first stab at US
2016 soyabean production was a surprise, offering a planting
figure well below trade forecasts and about 200,000 acres under
last years 82.7million (the latter also revised down in January
from 83.2m and trimming the 2015 crop to 106.95million tonnes
about the same as the record 2014 harvest.

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Milling and Grain - April 2016 | 89

Assuming trendline yields averaging 46.7 bushels/acre, the

2016 number points to the next crop reaching around 103million
tonnes which would still be one of the USAs biggest ever.
Although 5million tonnes down on the year, it would be more
than offset by an expected starting stock of 12.5million tonnes
7.3million more than last years total. Total US supply could

be bigger still if trade guesses are right that US farmers will

sow closer to 83.3million acres. More light will be shed on this
by the USDAs March 31, farm-survey-based acreage forecast.
Some analysts have meanwhile suggested a retreating El Nino
might raise the odds on a dry US growing season ahead, possibly
lowering yields but at this stage, long-range weather forecasts
tend to be rather unreliable so the markets might as well go with
normal for now.
US soyabean prices have been a bit firmer than expected in the
last couple of months as exports have begun to catch up from a
slow start, despite huge competition from Brazil and Argentina,
not only growing big crops (Brazils a new record) but both able
to use their weak currencies to undercut US export prices (though
that seems to be changing as the Brazilian Real made a surprise
hike this month). As a top importer, China has so far kept up
its record demand, despite the constant flow of negative news
about its economy, but has been switching more of its trade to the
cheaper South American suppliers.
World soyabean trade will only grow by about 4-5million
tonnes in 2015/16 against 8million last season and 10.5million
in 2013/14 but the important thing is, it is still expanding. China
is key to this growth as its crush has for years been dependent on
imports (it accounts for about two-thirds of the annual growth in
world soya trade.
Big supplies are expected to boost Brazilian exports by over
7million tonnes this season to a new record 58m. Just four
90 | April 2016 - Milling and Grain

years ago the figure was only 36million tonnes. Also Argentina
and Brazil combined have started this new season with nearly
51million tonnes of stocks over 9million more than last year
(already far above normal). Although Argentina will export at
least 1m tonnes more beans in 2015/16, its expected to put far
more of the extra supplies into domestic crush, expanding that
from 40.2million to 45.7million versus just 34m at the start of this
decade. Thats expected to bump up its soya meal exports to a new
record 36.8million tonnes (four years ago just 26m) almost half of
the global trade in the product.
While soyabean prices have held up, meal has continued to sag.
The February monthly average price in Europe (see chart) was the
lowest since October 2007 but thats in terms of US dollars a
windfall partially denied to EU importers since the euro collapsed.
However, soya plenty has continued to make up for shortfalls
in production of the main competing oilseeds, rapeseed and
sunflowers.
Rapeseed prices have been trending downward in recent
weeks, led by the Canadian market, which has fallen to tenmonth lows. The initial factor was a larger than expected
official Canadian harvest estimate followed by the government
estimating plentiful stocks. Recent news that these were
disappearing faster than expected into both domestic crush
and export channels, didnt lift prices due to reports that the
top rapeseed importer China was tightening its quality specs
to levels that its main supplier Canadas shippers think will
be difficult to meet, likely resulting some loss of this trade.
China is easily the largest single country outlet for rapeseed
and products. About a quarter of its crush of 18.7million tonnes
uses imported rapeseed, mainly from Canada. Some Canadian
traders think there may be opportunities to sell more to India
instead, where local oilseed production may fall short after a
sub-par Monsoon.
As Canadian planting approaches, the government has offered
a preliminary crop estimate of approximately four percent or
700,000 tonnes below the 17.2million tonnes that it estimated for
2015. The EU crop outlook this year is still seen, at best close to,
maybe a little less than last years 21.4million tonnes (although
one forecaster has it at 20.4m). The Commission sees EU 2016/17
rapeseed crush possibly dropping by 1.4million tonnes to 23.9m.
Less rapeseed is also expected to be available from key EU
supplier Ukraine, where the crop could be down 30% or more
after dry sowing curbed acreage and exposed crops to winter
losses.
However, by and large, rapeseed meal prices will have to
follow the trend in the larger, higher quality soya meal market.
The same applies to sunflower meal. As a spring planted crop in
the Northern hemisphere, its early to make estimates but early
pointers are offered, including larger plantings in Ukraine on land
released by failed winter wheat crops. Last year, Ukraine, the
worlds biggest sunflower exporter, sowed 5.4million hectares
and produced 11.3million tonnes versus the previous years
10.2million. Russias farm ministry in early March was, however,
expecting a dip in sunflower planted area.
Overall, soya should keep oilmeal supplies adequate for market
needs and prices under control. The seasonal flush of Latin
American supplies might even push prices lower for a time but
probably not far as markets will want to see sowing progress for
the US and other Northern Hemisphere crops.