Here’s something investors did not expect a week ago – wheat futures taking leadership of the grains complex.
If last Tuesday was all about US Department of Agriculture downgrades to forecasts for US soybean and, in particular, corn stocks, this one is more about Russia’s restrictions on wheat exports.
Russia - which had earlier revealed a E25-per-tonne tax on wheat exports from mid-February to the end of 2020-21 in June - late last week revealed it plans to lift that levy to E50 per tonne from March.
And it revealed too the prospect of a fresh levy in 2021-22, potentially based on the floating rate scheme already on the books for some five years, but which has been dormant of late, in being set to zero.
Volumes at stake
With Russia the world’s largest wheat exporter, the move has caused some market consternation, in signalling a cut to shipments ahead, and so spreading demand to other markets.
Just how much is a matter of debate. Ikar and SovEcon still see substantial Russian exports in 2020-21, outlining forecasts of 37.5m tonnes and 37m-38m tonnes apiece. (The US Department of Agriculture is on 39.0m tonnes, and the International Grains Council at 38.9m tonnes.)
But at US-based AgResource, for instance, Dan Basse has forecast Russia’s exports at a more modest 31m-32m tonnes, meaning a more significant volume displaced to other exporters.
Mr Basse sees the US, known in the wheat market as the exporter of last resort, picking up an extra 3m-4m tonnes.
Whatever, the extra demand, in meaning tighter stocks in the referred origins, implies higher prices.
This has been notably the case in the European Union, where Paris wheat futures have set seven-year highs on the prospect of enhanced demand for supplies limited by a disappointing 2020 harvest.
“Currently, the French origin is competitive on the international market but volumes are stretched due to the small crop of last year,” said Agritel.
“The next carry-over stock should be displayed on low levels before the arrival of the next crop from July.”
In the UK, where the 2020 harvest was the worst in nearly 40 years, meaning substantial import needs, London wheat futures have hit an eight-year high.
‘Continues to reverberate’
And prices will likely remain buoyant until there are signs of elevated values crimping demand to fit supply – ideas undermined at present by a tender revealed late on Monday by Algeria, which may regret keeping purchases low last time, at the end of December.
“In its last tender, the country only bought 300,000 tonnes, which was considered as a weak volume,” Agritel noted.
In short, “Russia’s higher tax on wheat, and it remaining in place beyond June, continues to reverberate through wheat markets,” said Tobin Gorey at Commonwealth Bank of Australia.
In the US - where markets were closed on Monday for a holiday, even as London and Paris wheat set their fresh multi-year highs – futures jumped out of the blocks, to stand 2.2% higher at $6.90 ¼ a bushel in Chicago for March delivery as of 10:20 UK time (04:20 Chicago time).
Still, it stopped just short of setting a fresh six-year, intraday high for a spot contract, as reached on Friday, at $6.93 a bushel.
Ditto Kansas City hard red winter wheat, which stood up 1.7% at $6.54 a bushel for March.
‘Pace of shipments is low’
Whereas of late it has been corn helping wheat futures higher, it was the other way round on Tuesday, when corn futures for March added 0.2% to $5.32 ¾ a bushel.
Not that the market lacks some supportive new snippets of its own, such as Ukraine’s announcement that it may limit corn exports in 2020-21, with a decision to be made next Monday.
Tightness in the corn market in Ukraine, the most significant corn exporter outside the Americas, has driven export prices there up some $23-26 per tonne so far this month to $256-264 per tonne, according to APK-Inform – exceeding the previous record high set in May 2014.
That said, the prices are already themselves doing much of the work of keeping corn in Ukraine, with Agritel noting that “at the beginning of the year, the pace of corn shipments is low”.
For grains as a whole this month, “Ukraine will be far from repeating the record shipment reached last year, with more than 4.5m tonnes loaded in January 2020,” with some 1.5m tonnes loaded so far, including 1.12m tonnes of corn.
Corn to hit $6?
Furthermore, there remain ideas that the USDA is underestimating demand for US corn supplies.
“Most look for US 2020-21 corn demand to be 400m-500m bushels more than the USDA’s latest guess,” said Steve Freed at ADM Investor Services.
“This could drop the [2020-21] carryout closer to 1,100m bushels versus the USDA’s 1,552m bushels,” as estimated in last week’s Wasde report.
“Most feel nearby corn futures could test $5.70-6.00 per bushel as 8m-10m tonnes of world demand shifts from South America to other origins.”
‘Should improve moisture’
But one depressant to bullish talk on Tuesday is a round of better weather for South America, where conditions are improving for corn and soybeans in both Argentina and Brazil, Maxar said.
In Brazilian corn and soybean growing areas, “rains in north western, central and southern areas should improve moisture, although some dryness will continue in far north eastern areas”.
In Argentina, “weekend rains improved moisture in Cordoba, Santa Fe, and Entre Rios,” the weather service said, although adding that “dryness will rebuild across the region this week”.
Soybean futures found the forecast more difficult to resist, particularly with vegetable oil markets adding extra pressure, on worries in particular in palm oil of prices having reached levels sufficient to ration demand.
Palm oil futures for April tumbled 2.3% to 3,272 ringgit a tonne in Kuala Lumpur, hitting the lowest level for a spot contract since late November.
That weighed on Chicago soyoil, which for March dipped 1.4% to 41.28 cents a pound, and in turn depressing values of soybeans themselves.
Soybeans for March shed 0.7% to $14.07 ½ a bushel - although well above a $13.85-a-bushel intraday low touched earlier.
‘Near the bottom of the bin’
Indeed, Mr Freed noted bullish talk remaining over the oilseed too, in saying that “most also feel US soybean demand [for 2020-21] could be 50m bushels higher than the USDA’s latest guess.
“Demand could even be higher but US carryout will be near the bottom of the bin.”
On prices there are ideas that season-average “US domestic cash prices could test either 2013 high near $13.00 a bushel or the 2012 high near $14.40 a bushel versus the USDA’s estimate of $11.15.
“This could suggest first objective of nearby soybean futures could be $15.30 a bushel, then $16.30 a bushel.”
In New York, cotton futures fared better than either of its rival row crops, adding 0.7% to 82.21 cents a pound for March delivery, finding greater cheer in better-than-expected economic growth, of 6.5%, reported by China for the October-to-December.
Cotton, as an industrial commodity, is particularly attuned to economic fortunes, and especially those in top importer China, whose currency, the renminbi, gained 0.2% against the dollar to polish its purchasing power.
The cotton market “continues to work higher, and the latest domestic balance sheet, combined with weakness in US currency, seems to justify such,” said Louis Rose at Rose Commodity Group, flagging too the nascent battle for acres in US spring sowings programmes.
“Cotton now needs to compete more fervently for 2021 acre with corn and soybeans, especially given the drought across west Texas.