Who compensates for those 6 million tons of wheat that the world market will not receive in this season from the Black Sea countries? To answer this question, first, let’s see what is happening in the European Union.
The supply there remains low for the same reason as in the Black Sea region. There are also troubles with the weather.
The EU is unlikely to be able to compensate for the above amount. Although the situation there is twofold. On the one hand, we see on the weather map many green spots in the west, signifying a large amount of precipitation.
The rains even surplus. For example, in France, there were heavy downpours, storms, which could adversely affect the quality of wheat. And in the north and east, on the contrary, lack of moisture. Particularly from this suffered Germany, the Baltic countries, partly Poland and Romania.
Therefore, in Spain and France, a good harvest and high yield are projected. In Germany, last week, on the contrary, the Association of Agricultural Cooperatives significantly lowered the production estimate to its lowest level since 2012 – up to 8.3 million tons.
In France, due to the high yield potential, the expectation of production growth is almost 38 million tons. There can be only two limiting factors – the reduction of areas and quality problems.
The estimation of production as a whole for the EU should be revised downwards. But a critical drop in comparison with the previous season (151.6 million tons) is not expected. USDA now yields 149 million tonnes, our estimate is slightly lower.
But in the EU it will be difficult to increase exports by more than 4 million tons because for this it will be necessary to increase the consumption of corn and vice versa to reduce the consumption of wheat for forage purposes.
Canada can put about 2 million tons on foreign markets, next season. In the southern hemisphere, the focus of traders is Australia. The drought persisted there for a long time, but recently in the west rains passed, and this made the situation better.
USDA forecasts in Australia 24 million tons of production and their local service of agriculture projects 22 million tons. If the situation does not worsen, then we can expect that exports from Australia will grow by 2 million tons.
In Argentina, there are no problems, and from them, we can count on 1.5 million tons of export growth in the next campaign.
But most of all, the situation in the United States puts pressure on the market. There, a harvesting campaign was launched in two key states – Kansas and Oklahoma. Yields were expected very low because of poor winter wheat ratings because of the drought.
However, it turned out to be better than the forecast. In addition, the States are improving the state of crops after rainfall. 40% is good and excellent, although until recently their share was 30%.
When the USDA published its report on June 12, at first the factor of the decline in wheat production in Russia was outweighed, and the market went up. Those who had time earned. But then all the attention was shifted to the American market, where everything went better than expected.
There are favorable conditions for spring wheat: 70% of crops are in excellent and good condition.
June 29 will be published the next USDA report with more accurate estimates of acreage for spring wheat, corn, soy. If the area of the spring wheat grows, and there are doubts, an additional factor of pressure on prices will appear.
In general, in America, there is a fairly comfortable balance – at the level of last year. Then there were more stocks and less production, but now it is vice versa. Still, reserves will remain high enough this season.
Accordingly, funds that held a large volume of long positions due to fears associated with drought and low winter wheat ratings, began to reduce these volumes.
On Chicago and Euronext, wheat prices began to adjust downward. And until we get more information on the real yield after the start of harvesting in Russia, and in the USA it will remain above expectations, it is difficult to expect a change in this exchange trend. This also puts pressure on our wheat.
Thus, the decline in the Black Sea region can be compensated at the expense of Australia, Canada, the EU and the United States. That is, the balance of the next campaign does not look very tense and quite corresponds to the current year.
There are no factors that could worsen the situation, yet. Even if production in the Black Sea region falls even lower, the US, in addition to an additional 1.5 million tons of exports of the coming season, may put its wheat stocks on foreign markets, if necessary.
In general, this situation will continue to affect the market for a long time after the seasonal pressure from the new crop until the beginning of autumn, that is, to put pressure on prices. Later, when the first harvest wave is absorbed, the outlook may become more bullish, and price increases are possible.
In Ukraine, the basis of wheat, that is, the difference between prices in the country and Euronext on the eve of the new harvest was high, according to futures, but now it began to decline.
For us, the more the basis, the better, that is, the more profitable the price. A low basis shows that we are undervalued in relation to the global market.
Now the basis will decline because of seasonality. Prices for forward contracts are still at a high level: food wheat – $ 180-186 / t, forage – $ 176 / t. There was even a small jump against the background of the revision of Russian wheat in the direction of decline.
But prices began to fall again by $ 1-2, and according to the results of harvesting, their decrease may intensify.
Summarizing the short-term forecast for wheat, we state: the world market remains under pressure because of the USA. Further, everything will depend on yields in Russia and Ukraine. If it is lower than expected, this will further exacerbate the pressure, if higher, then it will limit it and even support prices.
Long-term vision: price growth may be expected after October. Therefore, we recommend that you sell 30% of the future harvest, and 70% leave for later – until the situation in the Black Sea region becomes clear.
Now the moment is quite favorable: the prices are quite high and the basis, although it has decreased, now it is at a fairly favorable level.
Viktoria Blazhko, Agritel consultant
Based on: “Agrarian Markets Panorama Agritel”