As we move into the second half of May, we are probably within two weeks of the start of 2016 harvest in the northern hemisphere. In less than a month, it is likely that grain from the European harvest will become available. Time is passing for a weather-related production disaster to occur to help the prospects for grain price.
In recent weeks, I have been asked many times about the short- and longer-term prospects for grain price. What should someone with grain in store do? Should you sell (give it away) or hold firm in the hope of another price spike? This can only be answered correctly by someone who knows little, or with the benefit of hindsight.
Conjecture may be unhelpful at this point, so let’s look first at the facts. We are facing the prospect of a fourth year of record production globally against a background of high stock levels. If this materialises, you can expect further pressure on prices for the coming harvest.
The estimates for production, consumptions and stock levels for recent years and the coming harvest are shown in Table 1.
What are the chances that a weather event could actually happen? Eighteen months ago, I would have said that the odds were in favour of getting a weather event that would significantly hit production somewhere in the world. That didn’t happen and we ended up with a near-record crop. One year later, the odds should have favoured hitting a serious production problem somewhere. But now we are little more than six weeks away from the mainstream small-grains harvest in the northern hemisphere and there is little sign of real weather difficulties.
Of course, this could still happen, but it is increasingly a matter of wishful thinking. As of now, it would seem that if there is to be a significant weather event capable of turning price sentiment (something that would hit global production), it is likely to happen in maize production.
We already know that the evidence points to area increases in maize. This could offset any small yield decrease, should it occur. And if yield were to be normal or better, this points to another big maize crop, which is what is being forecasted (Table 1). The small grains area is already planted, but maize planting could still be influenced by limited planting opportunities and the recent price differential between maize and soyabeans, driven by the latter.
Maize/soya seesaw
In many parts of the world, maize and soyabeans compete for acres and relative prices drive this decision. The US market uses a soya-to-corn ratio of 2.3 as the neutral price relationship.
When this gets bigger soyabeans become more profitable and acres may be diverted towards soyabeans. But when this differential moves up to 2.7, which is what it has been recently, it is possible that a proportion of the later-planted maize may be diverted to soyabeans.
Two recent factors are driving a bullish or optimistic market outlook for soyabeans. There is talk of loss of up to 1.5m hectares of soyabeans in Argentina due to wet conditions. Roughly, half of this is said to be not harvestable and the other half is damaged. The second factor is the ever increasing demand for whole soyabeans in China where soya oil is the demand driver.
While there was rapid planting progress for maize in the US in April, rain subsequently slowed progress and then the soya price swing occurred.
In an early spring survey, US farmers indicated their intention to increase maize plantings by about 7%, despite poor forward prices. Maize area in the US had decreased in the two preceding seasons.
The big question now is will some of the remaining acres destined for maize be diverted into soyabeans? Such a move might calm the rise in soya price, which is still heavily influenced by investors and might add a little more optimism in the maize market. As stated previously, and shown in Figure 1, global maize production is estimated to be similar to 2013. So, there is another big global harvest on the cards.
Maize prices are being pulled up a little by the rise in soya, but not massively so. However, the real pressure is being driven by wheat which has record high stocks following the big harvest last year.
In the wheat market, news from the US suggests that the crop there is in better condition than in many previous seasons. Yield is expected to be up about 4% with output expected to rise also. This is in spite of a 7.5% decrease in harvestable area.
Prospects for wheat
World wheat production is not being given a universally favourable outlook, but global production for the 2016/17 marketing year is still being put at 717 million tonnes (mt), similar to 2013/14, but back on the record of 734mt in 2015/16. These high output levels have resulted in global wheat stock estimates increasing to 218mt as we head into the 2017 harvest, with total grains indicated to be 471mt.
Price pressure and spikes
As of now, the world still expects to produce another big crop in 2016, with inevitable consequences for prices. Against this background, buyers anticipate further pressure on prices and tend to put off purchases that might help stabilise the market. They do this in anticipation of adequate supplies, plus the possibility that price will be lower in the future. This sets the price trend as those who must sell are forced to discount their prices to secure sales.
However, the market can occasionally throw up an unexpected spike in feed demand and price, even in an oversupply situation. Demand can be spiked for reasons such as a lack of grass growth or drought and this can give rise to an unanticipated demand and price spike to secure immediate supply. Such price spikes are more likely to be international, but can be driven by all kinds of factors.
The current soya hike is as much to do with the fact that soyabean meal is not available at Argentinian ports because harvest and transport is being delayed due to the bad weather. So for someone who needs soyabean meal, the seller can name the price.
What are the chances of more price hikes to provide another selling opportunity for old or new crop prior to harvest? Such occurrences cannot be predicted – that’s why they occur. It is not unlikely that such spikes can occur again as we are very much in a weather market. Nature is the main supply adjustor but it has not intervened to any significant degree in recent years.
Supply patterns
There is one other factor that might be considered. In general, the grain market has been much less volatile in recent years than previously. That is not to suggest that we have not seen price movement – we have – but with the exception of the price movement of a few weeks ago, price graduations have been relatively mild but prices have been sliding (Figure 2). At the close of business last Friday, December MATIF wheat closed at €166/t – this had been as high as €196/t.
In some respects, the market is less nervous than it used to be and some ask if current genetics, especially in maize, are hardier and more climate-tolerant than the varieties of a decade ago? Many believe that the answer to this question is “yes” and this acts to quell fears of a poor harvest. This reduces the need to buy a proportion of one’s requirement forward, but opens the possibility for a surge in demand and price if a poor year occurs.
Global grain stocks stand at around 470mt, so there is no likelihood of a famine. It is important to remember that over half of these stocks could be held in private storage and will be liquidated if and when prices rise to a reasonable level. Such action would keep a lid on prices at the top end until much of this stock has been used.
Price drivers
What would have to happen to change sentiment to drive prices upwards? Well, excluding the occasional spike, supply would have to decrease or demand would have to increase significantly above the estimated level. With most of the crops already planted in the northern hemisphere, the area on which production is based is largely set.
Production is made up of area and yield, so what are the prospects for yield? We know how difficult it is to answer that one, given the experiences of recent years. But, as things stand, production is estimated on average yields and the actual yield could be higher or lower. If actual yield is higher than estimated, this results in a bigger surplus, higher stocks and, most likely, lower prices as owners drop prices to buy demand.
If average yield is lower, things will be somewhat different. The extent of any decrease will affect the potential for a price increase. A small decrease may not even have any effect given the high stock levels. But if there was to be a significant hit on production – a reduction of 50mt to 100mt globally – the market could see things differently. But it is likely that the upside on price might be €20/t to €30/t, while the downside could be €10/t to €15/t.
Some believe there is no scope for downside on current price levels. The market may try to pull prices lower but this would lead to a significant reduction in acres planted in the following year. This reduced production, particularly if coupled with below average yields, could lead to a significant upward price spiral. There is also the local realisation that if prices are lower, growers will not be able to clear their bills leading to increased debt.
The most immediate effect would be an acre switch from corn to soya in the US where planting is not completed. This appears to be happening already and price in the US has been nudged upwards as a consequence.
We already know that maize plantings are set to fall in China where a change in internal stock policy is making it more attractive to import, putting pressure on internal prices and production. But the full consequence of this is uncertain.
Elsewhere, in the northern hemisphere, wheat production in the US is expected to be up on recent years due to favourable growing conditions. However, conditions are now too wet in places and lodging is feared.
Wet is also causing concerns in France and dryness has already affected planting in Russia, Ukraine and other central European countries. There was also talk of dryness causing concerns in parts of Australia but in the western side, where most of the exports are produced, there appears to be adequate moisture.
While wheat in the US is virtually at the end of its production cycle – maize is only beginning. Weather events can affect this potential 350mt crop, starting with bad conditions early in the season. Planting progress is still well ahead of average. Drought and high temperatures are always a risk, but the question remains as to whether modern varieties are more weather-proof. But there is still the risk of severe damage from weather events such as hail showers, storms or excess wet.
While there are things that can go wrong, there is little belief at this point that they will.
The estimates for this harvest have been increasing month on month, with both wheat and maize production up on the previous estimate. While consumption is also estimated to be higher, predictions suggest a 6mt excess to add to surplus. So, all in all, it is not good news on prices.
Market sentiment for grain prices in 2016 remains heavily influenced by the increasing production estimates.If this high production level materialises, it will give a fourth record production year in a row, something not seen before.There are no certainties for production and things could still go wrong for crops, despite the huge potential.Even a small shortfall in this estimated production could lead to a significant deficit if estimated consumption levels hold. But consumption could fall slightly if price rises.
As we move into the second half of May, we are probably within two weeks of the start of 2016 harvest in the northern hemisphere. In less than a month, it is likely that grain from the European harvest will become available. Time is passing for a weather-related production disaster to occur to help the prospects for grain price.
In recent weeks, I have been asked many times about the short- and longer-term prospects for grain price. What should someone with grain in store do? Should you sell (give it away) or hold firm in the hope of another price spike? This can only be answered correctly by someone who knows little, or with the benefit of hindsight.
Conjecture may be unhelpful at this point, so let’s look first at the facts. We are facing the prospect of a fourth year of record production globally against a background of high stock levels. If this materialises, you can expect further pressure on prices for the coming harvest.
The estimates for production, consumptions and stock levels for recent years and the coming harvest are shown in Table 1.
What are the chances that a weather event could actually happen? Eighteen months ago, I would have said that the odds were in favour of getting a weather event that would significantly hit production somewhere in the world. That didn’t happen and we ended up with a near-record crop. One year later, the odds should have favoured hitting a serious production problem somewhere. But now we are little more than six weeks away from the mainstream small-grains harvest in the northern hemisphere and there is little sign of real weather difficulties.
Of course, this could still happen, but it is increasingly a matter of wishful thinking. As of now, it would seem that if there is to be a significant weather event capable of turning price sentiment (something that would hit global production), it is likely to happen in maize production.
We already know that the evidence points to area increases in maize. This could offset any small yield decrease, should it occur. And if yield were to be normal or better, this points to another big maize crop, which is what is being forecasted (Table 1). The small grains area is already planted, but maize planting could still be influenced by limited planting opportunities and the recent price differential between maize and soyabeans, driven by the latter.
Maize/soya seesaw
In many parts of the world, maize and soyabeans compete for acres and relative prices drive this decision. The US market uses a soya-to-corn ratio of 2.3 as the neutral price relationship.
When this gets bigger soyabeans become more profitable and acres may be diverted towards soyabeans. But when this differential moves up to 2.7, which is what it has been recently, it is possible that a proportion of the later-planted maize may be diverted to soyabeans.
Two recent factors are driving a bullish or optimistic market outlook for soyabeans. There is talk of loss of up to 1.5m hectares of soyabeans in Argentina due to wet conditions. Roughly, half of this is said to be not harvestable and the other half is damaged. The second factor is the ever increasing demand for whole soyabeans in China where soya oil is the demand driver.
While there was rapid planting progress for maize in the US in April, rain subsequently slowed progress and then the soya price swing occurred.
In an early spring survey, US farmers indicated their intention to increase maize plantings by about 7%, despite poor forward prices. Maize area in the US had decreased in the two preceding seasons.
The big question now is will some of the remaining acres destined for maize be diverted into soyabeans? Such a move might calm the rise in soya price, which is still heavily influenced by investors and might add a little more optimism in the maize market. As stated previously, and shown in Figure 1, global maize production is estimated to be similar to 2013. So, there is another big global harvest on the cards.
Maize prices are being pulled up a little by the rise in soya, but not massively so. However, the real pressure is being driven by wheat which has record high stocks following the big harvest last year.
In the wheat market, news from the US suggests that the crop there is in better condition than in many previous seasons. Yield is expected to be up about 4% with output expected to rise also. This is in spite of a 7.5% decrease in harvestable area.
Prospects for wheat
World wheat production is not being given a universally favourable outlook, but global production for the 2016/17 marketing year is still being put at 717 million tonnes (mt), similar to 2013/14, but back on the record of 734mt in 2015/16. These high output levels have resulted in global wheat stock estimates increasing to 218mt as we head into the 2017 harvest, with total grains indicated to be 471mt.
Price pressure and spikes
As of now, the world still expects to produce another big crop in 2016, with inevitable consequences for prices. Against this background, buyers anticipate further pressure on prices and tend to put off purchases that might help stabilise the market. They do this in anticipation of adequate supplies, plus the possibility that price will be lower in the future. This sets the price trend as those who must sell are forced to discount their prices to secure sales.
However, the market can occasionally throw up an unexpected spike in feed demand and price, even in an oversupply situation. Demand can be spiked for reasons such as a lack of grass growth or drought and this can give rise to an unanticipated demand and price spike to secure immediate supply. Such price spikes are more likely to be international, but can be driven by all kinds of factors.
The current soya hike is as much to do with the fact that soyabean meal is not available at Argentinian ports because harvest and transport is being delayed due to the bad weather. So for someone who needs soyabean meal, the seller can name the price.
What are the chances of more price hikes to provide another selling opportunity for old or new crop prior to harvest? Such occurrences cannot be predicted – that’s why they occur. It is not unlikely that such spikes can occur again as we are very much in a weather market. Nature is the main supply adjustor but it has not intervened to any significant degree in recent years.
Supply patterns
There is one other factor that might be considered. In general, the grain market has been much less volatile in recent years than previously. That is not to suggest that we have not seen price movement – we have – but with the exception of the price movement of a few weeks ago, price graduations have been relatively mild but prices have been sliding (Figure 2). At the close of business last Friday, December MATIF wheat closed at €166/t – this had been as high as €196/t.
In some respects, the market is less nervous than it used to be and some ask if current genetics, especially in maize, are hardier and more climate-tolerant than the varieties of a decade ago? Many believe that the answer to this question is “yes” and this acts to quell fears of a poor harvest. This reduces the need to buy a proportion of one’s requirement forward, but opens the possibility for a surge in demand and price if a poor year occurs.
Global grain stocks stand at around 470mt, so there is no likelihood of a famine. It is important to remember that over half of these stocks could be held in private storage and will be liquidated if and when prices rise to a reasonable level. Such action would keep a lid on prices at the top end until much of this stock has been used.
Price drivers
What would have to happen to change sentiment to drive prices upwards? Well, excluding the occasional spike, supply would have to decrease or demand would have to increase significantly above the estimated level. With most of the crops already planted in the northern hemisphere, the area on which production is based is largely set.
Production is made up of area and yield, so what are the prospects for yield? We know how difficult it is to answer that one, given the experiences of recent years. But, as things stand, production is estimated on average yields and the actual yield could be higher or lower. If actual yield is higher than estimated, this results in a bigger surplus, higher stocks and, most likely, lower prices as owners drop prices to buy demand.
If average yield is lower, things will be somewhat different. The extent of any decrease will affect the potential for a price increase. A small decrease may not even have any effect given the high stock levels. But if there was to be a significant hit on production – a reduction of 50mt to 100mt globally – the market could see things differently. But it is likely that the upside on price might be €20/t to €30/t, while the downside could be €10/t to €15/t.
Some believe there is no scope for downside on current price levels. The market may try to pull prices lower but this would lead to a significant reduction in acres planted in the following year. This reduced production, particularly if coupled with below average yields, could lead to a significant upward price spiral. There is also the local realisation that if prices are lower, growers will not be able to clear their bills leading to increased debt.
The most immediate effect would be an acre switch from corn to soya in the US where planting is not completed. This appears to be happening already and price in the US has been nudged upwards as a consequence.
We already know that maize plantings are set to fall in China where a change in internal stock policy is making it more attractive to import, putting pressure on internal prices and production. But the full consequence of this is uncertain.
Elsewhere, in the northern hemisphere, wheat production in the US is expected to be up on recent years due to favourable growing conditions. However, conditions are now too wet in places and lodging is feared.
Wet is also causing concerns in France and dryness has already affected planting in Russia, Ukraine and other central European countries. There was also talk of dryness causing concerns in parts of Australia but in the western side, where most of the exports are produced, there appears to be adequate moisture.
While wheat in the US is virtually at the end of its production cycle – maize is only beginning. Weather events can affect this potential 350mt crop, starting with bad conditions early in the season. Planting progress is still well ahead of average. Drought and high temperatures are always a risk, but the question remains as to whether modern varieties are more weather-proof. But there is still the risk of severe damage from weather events such as hail showers, storms or excess wet.
While there are things that can go wrong, there is little belief at this point that they will.
The estimates for this harvest have been increasing month on month, with both wheat and maize production up on the previous estimate. While consumption is also estimated to be higher, predictions suggest a 6mt excess to add to surplus. So, all in all, it is not good news on prices.
Market sentiment for grain prices in 2016 remains heavily influenced by the increasing production estimates.If this high production level materialises, it will give a fourth record production year in a row, something not seen before.There are no certainties for production and things could still go wrong for crops, despite the huge potential.Even a small shortfall in this estimated production could lead to a significant deficit if estimated consumption levels hold. But consumption could fall slightly if price rises. 
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