MARKETS OUTLOOK

Wheat market absorbs Russian export curbs

by John Buckley

Prior to the export

curbs, Russia was
expected to supply
about 22m tonnes or
14% of the worlds wheat
import needs in 2014/15.
The lions share of this,
about 17-18m tonnes, has
already been shipped,
already more or less
matching Russias
bumper 2013/14 exports
- with half the current
season still to run

54 | Milling and Grain

GLOBAL wheat markets have spent most of 2015 to date in retreat from a steep run-up in
prices in the final weeks of last year. Many readers may be aware that the main element in
that upturn was the decision by fourth largest exporter Russia to curb the too-rapid flow of its
once-plentiful milling wheat onto world markets at a time when doubts were rising about the
size of its next harvest. As the rouble nosedived with the collapse in value of Russias crude oil
exports and Western sanctions keeping Russian exports cheap - there did seem a real risk, as
the year turned, that too much of its wheat would be snapped up by foreign buyers, leaving its
domestic market short and at risk of escalating costs for that most basic staple, bread. Russia is
also thought to need more wheat and other cereals for animal feed this seaso as it tries to boost
domestic livestock output to replace embargoed meat imports from Europe and the USA.
Mindful that it couldnt simply embargo exports without reneging on its WTO obligations,
Russia initially used various indirect measures to slow them down, led by stricter phytosanitary
(plant health and other rd tape. These certainly put the brakes on trade during the late December/
early January timeslot. However, theyve now been overtaken by the introduction of a more
direct instrument in the form of an export duty, recently equal to around E30/$40 per tonne,
applying from February 1. This has been effective in cutting off further Russian sales in recent
weeks, yet seems to have been absorbed by the markets without less fuss than the earlier indirect
measures.
Prior to the export curbs, Russia was expected to supply about 22m tonnes or 14% of the
worlds wheat import needs in 2014/15. The lions share of this, about 17-18m tonnes, has
already been shipped, already more or less matching Russias bumper 2013/14 exports - with half
the current season still to run.
That partly explains the muted market reaction, despite the latest news that neighbouring
Ukraines government had also agreed voluntary curbs with its exporters on its Feb/Mar wheat
sales. These could be loosened up somewhat if its own winter wheat crop emerges in reasonable
condition from what (for both countries) has been a fairly challenging winter to date (dry start,
poor crop establishment, some snow cover issues raising greater than usual risk of winterkill
etc). However, like Russia, Ukraine has already shipped out the bulk of what it intended to
export during 2014/15 so this doesnt leave a huge gap in the market. At worst, the CIS absence
means the floor price of wheat on world markets is a bit higher than it would have been, had both
continued selling freely (i.e. no longer rock-bottom).
Even if Russian sales fall 2m to 4m tonnes
short of the target 22m this season, there is
no shortage of contenders to take its place.
Top of the list has been the EU, which
has recently seen some of its best weekly
export sales of the season and now seems on
course to match, if not exceed last seasons
record 30m tonne total. It could sell even
more without leaving EU consumers short.
Even after consuming an extra 9m tonnes
in animal feeds, Europe is still expected to
finish with carryover stocks of about 17m
tonnes compared with just 10m when the
season started, thanks to last years massive
domestic crop.
However, what this good clearance of EU
wheat supplies has done, along with the
weakest euro/dollar exchange rate for 11-
years has been to lift internal wheat prices

off the 4-year floor they tumbled onto last September. As we

go to press, the European milling wheat futures market is trading
about 30% over those lows, if still about 9% below its 2014
highs. Feed wheat prices had also dropped with this seasons
larger low/middling grade soft wheat supplies in countries like
France. The UK market has frequently been even weaker than the
Continent due to the relative strength of sterling versus the euro.
While consumers obviously wont cheer any cost increases,
most will probably recognise that farmers who last autumn faced
break-even or loss-making prices have to make a living too, to
ensure continuity of supply.
Summing up, world markets, where the value of wheat is
ultimately made, still appear to be amply supplied for the rest of
2014/15 to end June. The USDAs own global crop estimate has even
risen further since our last review, by about 3m to a new record 723m
tonnes, or about 8m more than last year. USDA has also edged up its
estimate of global wheat consumption although this remains about
10m under production which means end-season carryover stocks rise
by the same amount to a comfortable 196m tonnes about 27.5% of
projected consumption or 14 weeks supply.

56 | Milling and Grain

These extra stocks provide a cushion against an expected

smaller world wheat crop in 2015. Recent estimates suggest the
negative outlook for Russian and Ukrainian crops will knock
about 10m tonnes off their combined output this summer. That
might be offset somewhat if they plant more spring wheat but that
yields less than winter wheat. There is also much concern about
how both countries will finance their seed and input needs for
these crops (especially the significant imported portion of these)
as their currencies continue to tumble a factor that could take
another bite out of yields.
The EUs own 2015 wheat outlook is a bit of a mixed bag with
some countries apparently sowing a bit less, others more, some
in need of more rain, some at risk of possible frost damage etc.
One recent private estimate suggested output could be about 7m
tonnes down from last years crop based on yields also coming
off last years highs. However, it shouldnt be forgotten, that the
2014 crop was a record one at 155.5m tonnes, 12m more than in
2013 and 22m over 2012 so this would hardly be a disaster.
The USA has also had some weather issues affecting winter
wheat potential, lingering dryness in some areas, frost threats in
others and a general crop rating
below this time last years.
Even so, some analysts expect
a slightly larger crop based on
area increases.
Canadas crop is a bit of an
open book at this stage, the
bulk not sown until the spring
so much depends on weather
then and relative returns from
competing crops like rapeseed.
Current government thiking
there is that overall acreage will
increase by almost 800,000 acres
but the lions share of that gain
will be for duruym rather than
spring breadwheats.
Among the other big suppliers,
Australian and Argentine crops
(technically 2014/15 harvests
but the bulk marketed in 2015)
are both adequate. Australia is
currently expected to export at
least as much as last years 18m
tonnes while the USDA sees
Argentine trade exports soaring
from just 1.6m in 2013/14 to as
much as 6m tonnes. However,
that assumes a less restrictive
export policy, which may an be
optimistic hope, given that the
government has only recently
told exporters they wont get
permits unless they pass on a
fair share of the world prices to
farmers.
That said, the above export
potential is easily enough
to make up for any Russian
shortfall - albeit at a higher price
than if Russia had continued to
sell freely.
But the list doesnt end there.
To these regular exporters can

anything the experts could have imagined, market chatter has

be added other non-traditional potential wheat suppliers. India
begun to question not only the level of discretionary (voluntary)
burdened with huge stocks after three successive large harvests,
blending but the longer term viability of the mandate itself.
wants to export about 2m tonnes while neighbouring Pakistan,
There have even been some moves in Congress to challenge the
more frequently an importer, reportedly plans to put about 3m
mandate although current opinion suggests these are unlikely to
tonnes on world markets.
succeed at this stage.
Finally we should not rule out both Russia and Ukraine
Still, the fundamental question needs to be answered, what
returning to the market as exporters sooner than harvest time.
happens to ethanol demand in the longer term if the green fuel
It has happened before after past embargoes and both will want
cant be produced as cheaply as petrol? No one saw this coming
to do all they can to re-portray themselves as reliable suppliers,
and opinion is unsurprisingly split on how long it will last. Will
once their domestic needs appear to have been safeguarded.
crudes demise contain fracking and reduce less-economical
Overall then, there is nothing much in wheat supply/demand
fossil fuel production and, if so, over what timeframe? The irony
fundamentals to justify price rises and, depending how the CIS
is that US ethanol production was recently running at record
crops shape up, maybe even potential for cheaper wheat. This
levels, buoyed up by the collapse of maize feedstock costs over
isnt yet apparent on the US futures markets where the forward
the past two years.
months carry a small premium. However, European new crop
Whether or not ethanol continues to account for about 40%
wheat is slightly cheaper than current months.
of US corn disposals, supplies of the coarse grain will remain
Maize crop estimate trimmed but still huge
in substantial surplus. Even after trimming the US 2014 crop
Like wheat, maize has been getting cheaper into the New Year
estimate by almost 5m tonnes in January, the USDA still has
after an earlier run-up in prices. The latter move reflected a
production at an all-time record high of 361m tonnes. That
combination of factors including better than expected domestic
and export demand for US maize,
ideas the latters 2014 crop had
been over-rated, forecasts that its
farmers would sow less in 2015
and some dry weather issues
overhanging prospects for the
South American harvests coming
on stream this spring.
Given the way some of these
fundamentals have shifted to a
more bearish slant in early 2015,
it seems mildly surprising that
the US market hasnt come down
more (Its lost about 9% from its
GRINDING
mid-December
DOSING
Probably the biggest
undermining influence has
A TAILOR MADE
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FEED PRODUCTION
international value of crude oil
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Saudis) attempts to make up

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Its hard to over-state the impact
that ethanol has had on US maize
disposal and values and, to a
lesser extent total world grain use
in the fuel sector in recent years.
Ten years ago, US annual maize
use in this outlet was a mere 33m
tonnes. This season its expected
to exceed 130m.
When crude oil prices began
their collapse earlier last year,
it was assumed that usage
would remain protected by the
governments legally binding
minimum blending requirement
within the Renewable Fuel
Standard. But as crude prices
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February 2015 | 57

compares with US consumption of 301m and exports of 44.5m.

The surplus will allow the US to go into 2015/16 season with
48m tonnes of stock versus 31m this season and just 21m the
previous year.
Global maize output is meanwhile estimated at 988m tonnes
about 17m over consumption, resulting in stocks rising by that
amount to 189m. As in the USA, this is the highest stock for
some years. Its moderated somewhat by the fact that over 40% of
it is held in China, whose figures are often considered unreliable
and whose quality is usually thought questionable in comparison
with maize from the other big producers. Nonetheless, the market

must accept that maize on paper/in fact is in loose supply.

In recent weeks, maize markets have also been watching the
weather in South America, which seems to have improved
after a dry start in Brazil and some excess rain and flooding in
Argentina. Some Brazilian private estimates are running about
5m tonnes over the USDAs 75m tonne forecast (down about 4m
on last year). Argentina is expected to produce about 22m versus
last years 25m tonnes.
Although previously up-and-coming exporter Ukraines last
crop was also 4m tonnes lower than the previous years it is still
a big one by historical comparison. Its exports will be down by a
similar amount and have so far been a bit slower than expected.
However, as we go to press, it seems to be stepping up sales and
undercutting the dominant US exporter by about $8 to $10 per
tonne.
US exports have performed quite well so far this season,

58 | Milling and Grain

underpinning prices on the bellwether Chicago futures market to

some extent. However, with Ukrainian, then Lat-Am competition
expected to pick up later into first quarter 2015 and beyond,
export-based support for US prices will likely diminish. Although
US feed demand is thought to be expanding this season (helped
by lower maize costs amid higher meat prices) it may not be
enough to fend off bearish supply-side pressures if ethanol
demand does weaken.
Further forward, crop analysts have been expecting the US sow
less maize this spring but a predicted shift to soyabeans may be
smaller than earlier thought as soya prices are currently dropping
faster. As always, though, the weather at planting time will have a
huge influence on the mix of crops.
Within the EU, maize demand is expected to edge up by about
1m tonnes to a new peak of 77m but with the domestic crop up
by almost 10m tonnes, Europea consumers will be able to slash
their dependence on imports from 16m to perhaps 6m or 7m
tonnes. With demand from other importers expected to be down
by a similar amount, maize looks more and more like a buyers
than a sellers market. As in the wheat market, then, there is not
much in the fundamentals to support higher prices going forward
- despite US futures markets quoting new crop up to 10% dearer
than current months.
Soya supply glut looms
If Europe were growing more soyabeans, rather than importing
the bulk of its 13.5m tonne crush, meal costs might be falling
with the global trend amid the largest surplus on record.
However, while dollar-quoted meal prices have dropped by about
25% this season, the euro has tumbled to its lowest in 11 years
versus the US currency, keeping prices on the Continent more
expensive than in the autumn of 2014. Even UK consumers
cushioned by relatively stronger sterling versus the euro, are not
doing so well when dollars are turned to pounds, robbing them of
much of the benefit of the sliding US price.
That said, European meal costs are at least being restrained
somewhat by the supply glut and, as the largest ever South
American soya harvests crank up, this could yet exert more
downward price pressure on both sides of the channel.
Most of the increase in this seasons global oilseed and meal
production is in soyabeans, for which world output has recently
been estimated at 314.5m tonnes up by about 2m since our
last review and a hefty 30m tonnes over last years crop. That
increase would equal about 24m tonnes more meal if all were
crushed. In fact, only about half the extra beans will be used for
feed, creating about 11.5m tonne more meal which roughly
equals the expected rise in this seasons global meal demand.
The high end-season stocks of soyabeans (a record 91m tonnes
versus last years 66m and about 55m in the previous two
seasons) provide an ample cushion against any supply shortfalls
from coming soya crops. Over the past two months, weather has
steadily improved for South American oilseed crops, confirming
record output to be marketed over coming months. A weak
Brazilian currency should help ensure good exports from the
major supplier to cash in on the strong dollars in which beans
are traded. Estimates have recently been raised for Argentinas
coming crop, which should ensure very large exports from this
supplier too. Argentina crushes two thirds of its crop to export as
meal, for which it is far and away the worlds largest supplier.
In a couple of months time, the US will start planting its own
soya crop which some analysts think will expand by about 2m
acres to cover a new record area. Even if yields dip from last
years record highs closer to the long-term trend, that would
deliver another mega crop, currently seen around 104/105m

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tonnes below last years record 108m but far more than the
normal 85m/90m tonnes of recent years.
Of course, we have yet to see what weather will accompany
the US sowing and growing season up to September. But if
conditions are normal, it is hard to see how this supply outlook
can point to anything but flat to weaker prices. The futures
markets currently show only small discounts on forward soya
beans and meal. However, some analysts see leeway for bean
prices (already down 37% from last summers highs) to drop by a
further 10-15% under this scenario, As soya is so protein-rich and
usually a reliable quality leader, pricing of other oilmeals will, as
usual, have to broadly follow the soya price trend.
The European feed industry is expected to use about 1m tonnes
more soya meal this season. The rest of the increase is spread
over China (+5m), the USA (+1m), Brazil (+0.4m) and a number
of small/moderate-sized consuming countries.

KEY FACTORS AHEAD

WHEAT
Concern persists over the state of Russian winter sown wheat
crops, a larger percentage than normal described as in poor
condition. A better picture will be available when plants
emerge from dormancy in the spring. The outcome could have
considerable influence on wheat prices going forward at this
stage seen more bullish than bearish.
Ukraine has also had some over-wintering problems tha will
become clearer in a few weeks time. Its massive currency
devaluation during February (in addition to an earlier long
slide) augurs ill for spring crop finance and yields although
maybe it will get some financial help fro western aid packages.
Russia also faces problems of spring crop finance at a time
when it needs to boost sowings on failed winter crop lands.
Crop ratings have continued to deteriorate for US winter wheat
for harvest 2015 but some timely rains could yet allow some
recovery. This has not emerged as a major factor yet because
60 | Milling and Grain

the most affected crop has been soft red wheat, for which
export demand remains poor amid hefty foreign competition
for this class.
European crops have had a generally unchallenging, mild
winter but lack of hardening off leaves them exposed to frost
damage from late cold snaps.
World stocks of wheat carried into 2015/16 remain hefty, a
cushion against any crop weather problems in the months ahead.
The drop in wheat values close to or, for some farmers below,
cost of production remains an issue that may affect future
sowing plans.
Decent quality premiums will continue to merited for milling/
bread wheats as feed wheat prices remain under pressure from
large, cheap supplies of coarse grains.
Global feed consumption of wheat is still expected to rise by
about 10m tonnes this season but remain below the high levels
of three years ago. But will ethanol use of wheat hold up at
expected levels in Europe under the low oil-price scenario?

COARSE GRAINS
How much maize will the US sow in 2015? Current forecasts
suggest a cutback but still enough for another large crop which,
with large carryover stocks from this season, will keep this
market well-supplied.
Ukrainian and Russia spring sowing of maize may face
financing challenges caused by their lack of access to credit,
weak currencies pushing up imported input prices. A clearer
picrure may be available on this factor within the next couple
of months
Ample maize supplies from Latin America and the CIS
countries will continue to compete at discounts to US exports
in Asia, Europe and other markets, restraining CBOT maize
futures prices and global prices.
The EU has been well supplied with its own maize crop this
season, enabling it to slash imports the main factor in a lower
global maize trade. Will it sow as much for 2015?
Competition for coarse grain customers continues from larger
than usual feed wheat and adequate barley supplies, helping to
contain livestock feeders costs
Will the US ethanol industry continue to use as much maize if
the price of conventional petrol stays down/gets cheaper still?
Declaring its policy to move to a more market-oriented plan,
China could draw down more of its own massive reserve stocks
rather than imports - to fill its ongoing annual gap between
domestic crops and growing consumption. That would removes
a potential bullish influence for world maize export markets
OILMEALS/PROTEINS
Large US and Lat-Am soyabean crop surpluses continue
to offer potential for cheaper global oilmeal costs as 2015
progresses
Lower oilmeal costs and ample supplies may yet spur greater
than expected demand in countries developing livestock
production systems China, India, Indonesia etc. Developed
consumers like the USA may also use more as high meat prices
contribute to profitability.
Rapeseed and sunflower expansions have slowed down or
reversed in the past year but as oil-rich oilseeds these will
have less impact on the meal sector.
One result is that soya will raise its already dominant share
of the protein market. As the high-protein, reliable quality
and most voluminous product, its price trend will have to be
followed across the meal sector.

Wishing the team at

Milling and Grain

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