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Strong EU grain harvest won't rebuild thin stocks

Prospects look good for the European Union grains harvest â€" but not good enough to dispel market nerves over supplies, with stocks likely to fall in in 2014-15 after failing to rebuild this season.

The EU will produce 296m tonnes of grains this year, down 6m tonnes on the 2013 harvest but still one of the strongest results on record, US Department of Agriculture foreign staff said in their first forecasts for the forthcoming harvest.

However, bumper demand for grains â€" both domestically and in the export market for wheat in particular â€" which is allowing only a "limited recovery" in stocks in 2013-14 will continue to undermine an inventory rebuild.

"With total domestic consumption forecast little changed in 2014-15, stocks are currently forecast to fall once again, even with a forecast reduction in exports," the USDA staff said in a report.

In fact, EU wheat exports "are forecast to remain high, at 25m tonnes" next season, which would be close to record levels were it not for the 28m tonnes expected to be shipped in 2013-14.

‘Market is nervous'

The dynamics limit the EU's cushion against supply setbacks, especially if the crisis in neighbouring Ukraine limits shipments from a country which is a main rival in exports, besides being a major shipper to the bloc itself.

"Total grain stock levels remain relatively low meaning there is little room in the balance for a supply shock should the current grain harvest forecast not be achieved or the situation in Ukraine impacts on the global trade balance," the report said.

"Although grain exports from Ukraine are reported to be unaffected at this time, recent rises in futures prices suggest the market is nervous looking forward."

Concerns were particularly acute over wheat, of which the EU is the world's top producer, besides being a major exporter.

Although "sentiment is good" towards wheat crop prospects, "with the EU entering a critical yield- and quality-determining weather period, this could change.

"Any downward movement in yield expectations or reduction in likely quality will be of interest to the market given the tightness in the EU28 balance this season and the prospect of limited carry in stocks from 2013-14."

‘Severe drought'

The report forecast this year's EU wheat harvest at 144.8m tonnes, up 1.5m tonnes year on year, and a figure in line with other estimates.

The European Commission has pegged the crop at 144.5m tonnes, including 8.67m tonnes of durum, the type used in making pasta, while Strategie Grains foresees a 145.1m-tonne harvest.

The International Grains Council has pencilled in a 143.0m-tonne harvest.

The UDSA staff highlighted potential threats to the crop as including dryness in some eastern EU countries, including Hungary, where after a "severe drought" last summer has been followed by "insufficient precipitation" in the autumn and winter too.

"Similarly, in contrast to the traditional concerns regarding frost damage, the late-planted winter wheat crop in the Czech Republic has over wintered well but is also reported to be in need of rain."

‘Disease pressure'

By contrast, an unusually wet winter in parts of France, the EU's top wheat producing country, and in the third-ranked UK means that "plant root systems are not well developed which may leave them more susceptible to dry conditions in the coming months".

"The milder winter temperatures have also encouraged excessive growth, meaning increased likelihood of lodging come harvest, and disease pressure," the report said, echoing concerns raised in the UK by consultancy Adas.

"Further, fertilizer and pesticide applications have been delayed, increasing the risk of lower protein content, although the latter part of March has seen drier weather in both countries."

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