Trading grain in a changed world

by Chris Lyddon
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There is huge potential for extra production of grains and oilseeds around the world. Farmers are going to push crop output higher, especially where currency makes growing a crop for the world market more attractive than it might seem to those outside, delegates at the recent Cereals Europe 2016 Conference in Geneva learned.

Piers Corbyn, astrophysicist and founder of WeatherAction long-range forecasters, and Scott A. Yuknis, who spoke to the conference by audio link, owner and founder of Climate Impact Company, Inc., looked at the impact of weather.

“The weather is not primarily caused by the weather,” said Corbyn, explaining the long-term cycles which affect it. “These all come from solar activity. External influences are moving the jet stream. Solar activity is moving the jet stream and we can predict how this is going to happen.”

That means he does not believe the climate is being affected by man-made carbon dioxide.

“The idea of a cooler climate ahead makes sense to me,” said Scott Yuknis, agreeing with Corbyn’s ideas on cycles.

“What we will probably see over the next couple of months is El Niño certainly weakening. Models point to a weak La Niña developing toward late season. There will be a lot of volatility in the weather pattern, coming out of spring and into the summer season.”

William Tierney, chief economist for AgResource Company, pointed out how the wheat market has changed.

“Twenty-five years ago, I was at the center of the world wheat crop,” he said. “I was in Kansas. The Kansas wheat crop doesn’t matter any longer. The U.S. wheat crop almost doesn’t matter any longer. World wheat stocks will be the highest in 16 years. Wheat supplies of the major exporters will be down. That could end up being an incorrect statement if the upside of production is achieved.

“I think our numbers are responsibly conservative. If we have a drought this summer and corn that goes to six dollars, what is going to be the price of wheat? You will not see wheat prices drop below corn prices. As corn prices fall, it tends to weaken wheat prices.”

The major wild card is what happens in the Black Sea, he said, noting that Russia’s crop is not yet ripe for harvest.

“The Russian wheat crop is uniquely susceptible to drought,” he said. “The impact of weather risk in the former Soviet Union is exacerbated by policy uncertainty. There does appear, over the last five years, to be a relationship between Russia’s ending stocks-to-use ratio and the August-September low in Russian wheat prices.

“Russia could intervene in the marketplace if it wanted to support prices. If Russian prices stay at world prices, the floor is significantly below where prices are now.”

That, he said, is assuming that Russia does not change its support price.

The U.S. picture

Wheat prices in the U.S. will continue to fall, he predicted. “Even though we have production down and total supplies are greater (in 2016-17), we are looking for roughly 20% fall in prices,” he said.

That is more than justified by supply and outside factors, Tierney said.

Regarding corn, the U.S. is increasingly at a premium.

“It puts us at a disadvantage,” he said. “U.S. yield – that’s the number one factor this year,” he said. “The number two factor is the extent of export competition. Number three is how all the confusing changes in China’s corn policy work their way through.”

Changes in China’s foreign policy could have a reverse biofuel effect, he said.

“Just like that drove up global prices, I think changes in China’s policy could drive down prices,” Tierney said. “If I say global corn prices are going to go down this year, I think that’s going to have an effect on the European barley price. Some people say China is going to be able to eat its way out of corn stocks.”

He said the data concerning Chinese meat production are contradictory. “It’s been flat for the last three years,” he said.

China would need a long time to get through its corn stocks. “It’s at least five years to get it down to a manageable level,” he said. “Chicago corn futures were below two dollars 10 years ago,” he said. “That’s 44% below today’s prices.”

Pedro Dejneka, managing partner at AGR BRASIL and AGR LATAM, described the growing importance of South America as an export origin and the great potential of the region for the future.

“Brazil has been investing very heavily in infrastructure. Brazilians find a way to make anything work,” he said, noting the sharp increase in production in the north. “The currency plays in our favor.”

Getting soybeans from the north to southern ports, which they had to use a few years ago, was difficult. Now northern ports have improved, although there has not been as great an improvement in the infrastructure to get to the ports.

“It’s extremely expensive to get soybeans from here all the way down to Santos,” he said. “About three years ago, it was terrible. You couldn’t get ships out. That is over.

He said road improvements that are taking place will be completed within the next 15 years, and that will be a game changer.

“Imagine what the country will do on the export side when this is ready,” he said, noting that Brazil also plans to rely more on rail and less on highways.

“South America is here to stay,” he said. “The Brazilian farmer is already 70% sold; that’s not hoarding. The dollar took off against the real. The currency is trading on politics. The Brazilian farmer is extremely profitable. It gives them a cushion.”

He said although the overall economy in Brazil is struggling, the farming sector is thriving.

“The big farmers and the medium farmers are very efficient. They hedge. Brazil has a lot of arable land potential,” he said. “That expansion is happening. By 2025 Brazil will be producing 130 million tonnes of soybeans. Are you guys hungry? I don’t know where all those soybeans are going to go.”

E.U. wheat situation

Noel Fryer looked at the E.U. wheat supply and demand for 2016-17.

“If you look at trend yield, we will obviously be below last year’s record,” he said. “We have a 34-million-tonne exportable surplus next year.”

However, taking stocks back to last year’s level would mean exports of 43 million tonnes.

“There is no reason to see any demand over and above what we have today,” he said. “Between the E.U. and Russia, we potentially have 18 million tonnes additional exportable surplus this year. Whichever way you turn this, there is more than enough wheat to go round. You need a significant weather event to change this.”

He also highlighted how currency has encouraged planting in Russia.

“A 30% drop in the U.S. dollar price gave a 40% rise in the ruble price,” he said.

It also has had a dramatic effect in Argentina. “You can understand why people say the Argentine wheat area is going to go up 40%,” he said. “They will export. You get back to the same theme of big crops getting bigger, and we are struggling to find demand,” he said.

A panel discussion of experts on the Black Sea region underlined the same point. “They are still sitting on a lot of money,” Kees Vrins of Allseeds Switzerland said of Russian farmers. “For them, the product is a natural hedge against devaluation.”

Jonathan Grange, manager and cash broker with Vicorus, looked at issues affecting the global oilseeds market.

“I’m not positive on the Chinese economy,” he said. “There is a very strong chance of a hard landing in China.”

Terrorism would also have an effect, he said. “It is a suppressor of demand,” he said.

Other factors that could impact the oilseed market include the U.S. presidential election and the question mark over British membership with the European Union. “There is still a lot of political uncertainty in the world.”

Palm oil is a huge factor in the world vegetable oils and has become much bigger in the last 20 years, he said. “Palm oil is now 65% of world trade in vegetable oil. Devaluation is double-edged. There are a lot of inputs that are priced in local currency.”

India is the big variable in the vegetable oil market, he said.

“We don’t think that India is going to slow down. The growth in domestic demand is phenomenal.”

He said there will potentially be a 4-million-tonne drop in stocks, referring to the world oilseed situation. “We have only just started putting things in the ground. There is a huge weather variable. We are not out of the woods on vegetable oils until we get the crops assured by the middle of July,” he said.

Bell Chen, senior vice-president of Asian Markets, said, “Oversupply is an economic problem. Short supply is a political problem. China’s government has been guaranteeing supply to consumers, while guaranteeing income to the farmer.”

The country has 400 million farmers and the government wants to “keep them on farm,” he said. “It’s a key element of stability.”

China’s government would have to deal with its enormous corn stocks, he said. “We are going to sell corn in any bounce.”

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