Trade Talks, Restrictions Dominate Grain Markets
Grain markets pushed into the third full week of January with most continuing to watch the U.S. government shutdown debacle and updates on trade negotiations between the U.S. and China. For the former, the end of the shutdown would mean that we would start to get information finally out of the USDA. This would include export sales and shipments and previously unreleased reports like U.S. winter wheat acreage and the January WASDE report.
Meanwhile, the trade talks between China and the U.S. are settling in on talking about the trade imbalance between the world’s two largest economies. The trade disruption between the two countries, as it stands today, is easily the biggest discussion topic at the World Economic Forum this week in Davos, Switzerland.
As I said in my outlook for 2019 grain markets though, there are a lot of other economic headwinds that has caused concern by some very smart people for what may lay ahead in financial markets. Even the International Monetary Fund says that there are increasingly more risks to “downward corrections”.
The Russian Agriculture Ministry put out its first estimate of their 2019/20 harvest, pegging total production of all grains at 114.3 MMT. This would be larger than the 2018/19 harvest and mainly attributed to the increase in wheat and barley acres seeded this past fall.
Dwindling wheat stocks in the Black Sea – namely Russia and Ukraine – are starting to support wheat prices. Since mid-2018, the two Black Sea exporters have been shipping out wheat at a torrid pace and it’s starting to show. This is something that we discussed in detail in our recap of 2018 wheat prices a few weeks ago.
On Friday last week, the Russian Agriculture Minister said that they’re looking to control domestic grain prices (namely wheat prices) through the means of subsidies for rail freight.  By supporting the cost of freight to pull wheat from locations further away from the ports, this would help maintain a port price that’s still competitive on the global level.
The alternative, of course, is that the port price of Russian wheat would go up, since it’s costing exporters more to get it there. Should that be the case, then you’ll likely see wheat prices from the likes of the U.S., Canada, Europe, and Argentina become more competitive. As a reminder, here’s a look at how the USDA last projected the top wheat exporters from their December WASDE report.
In Ukraine, more than 83% of the agreed volume of milling wheat exports has already been shipped. This, despite more than 5 months still left to go in the 2018/19 shipping season / crop year. That said, the Ukrainian Ministry of Agriculture there has urged those in the wheat exports game to comply with the limitation memorandum set a few months ago. It’s to be determined if the players will all follow the rules!
Quick sidenote: one of the places that a lot of Black Sea wheat exports head is Egypt. The state grain buying agency there, the GASC, recently got $1 Billion in funding to help speed up the payment process to their wheat suppliers. More recently, there has been a lot of question marks around Egypt’s ability to pay for their grain imports as a result of a foreign exchange crunch. This deal likely could mean that the financing associated with deferred payments will be taken out of offers provided to the GASC. Translation: wheat prices offered to Egypt could drop by $3 - $4 USD / metric tonne.
Getting into the meat and potatoes of wheat markets, colder weather across North America through this past weekend are making the usual headlines about whether or not a winter wheat crop will have enough snow cover to guard against the frigid temperatures. Usually, this helps support wheat prices for a few weeks before the story runs its course and some data defends the fact that the winter wheat crop will be just fine.
Here in Western Canada, we’ve seen spot prices of hard red spring continue to perform relatively while, when compared to where we were a year ago. While not exactly, at the highs seen in May/June 2018, we’re actually not far off. This is mainly because of the tighter situation in the wheat exports game and strong pace of exports out of Canada thus (8.5 MMT of non-durum Canadian wheat has been exported through Week 24 of the 2018/19 crop year, up 18% year-over-year).
Comparably, futures prices in Winnipeg on the front month have been also trying to find some legs, but unlike cash prices in Western Canada, values are actually tracking behind where we were a year ago.
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