Wheat Slides With Outside Markets
Alongside the rest of the complex, wheat markets on the futures board finished the month of January rather ugly as traders headed for the sidelines.
The main reason behind the flee in capital is the unknown impact of the coronavirus on economic activity, not just in China, but globally. For perspective, the number of deaths attributed to the coronavirus has now passed the number of unfortunate deceased from the SARS virus in 2003. The only difference, however, is that in 2003, China’s GDP accounted for only about 4% of the global economy; today it’s closer to 16%. Many are asking what it’s going to take to stop the slide in both grain and equity markets that’s now extending into February. It doesn’t help that China is asking the U.S. for some flexibility on meeting agricultural purchasing targets in the Phase One trade deal as they have concerns that this unforeseeable event may prevent their ability to execute/comply.
The other major global headline that traders are keeping an eye on is Brexit. Wit the United Kingdom officially leaving the European union on Friday, January 31st, an 11-month transition now begins in which the UK will still abide by EU rules and regulations but, over that time, negotiate a new trade deal for the two “nations”. That new deal has to be in place by December 31st but the U.K. will also have to negotiate new trade deals with the likes of the United States and Canada. On that note, the impact on agricultural trade is uncertain at this point. Myself, AWC General Manager Tom Steve, and a few others talked in a recent CBC article about the importance of keeping tradeflows open, especially for wheat.
Given their wet/martime climate, the U.K. has to import most of their bread-making wheat and so now the window is open to perhaps build on the relationships we have with importers there to buy more high quality Canadian wheat. It would be welcome addition as non-durum Canadian wheat exports continue to slip, tracking now 17% behind a year ago with less than 7.4 MMT sailed.
Looking abroad again, the International Grains Council is forecasting more wheat in the world in 2020 and it looks like Russia will do its part. The Russian Ministry of Agriculture is pegging total grain production in the 2020/21 at 125 MMT, up 3% year-over-year if realized. Further, the Russian weather forecaster, Hydrometcentre, says that just 4% of the winter wheat crop in Russia is in poor condition, half of what it was at this time a year ago. However, while it looks like Russia’s wheat harvest could be big again, Russia’s Deputy Ag Minister said last week that Russia plans to set up grain export quotas each marketing season, not just the remainder of 2019/20.
This bring us to the role that substitution effects play in globalized trade. Indonesia wheat buyers were recently quoted saying that they’ll just go buy more Ukrainian wheat if Russia intervenes in the market in the form of quotas. Similarly, the USDA’s attaché in Australia says 2019/20 wheat exports from the Land Down Undaa will total just 8 MMT, down 1 MMT year-over-year and 200,000 MT below the official USDA forecast. With Australia export less, Asian millers will have to look elsewhere for some of their buying, or rather, substitute Aussie wheat for Canadian, American, or other wheat.
Therein is the challenge – how do we know when these opportunities arise? Despite the terabytes of information that fly across our screens every day, it’s tough to be able to clear through the noise and understand what’s real and what’s not; what’s good for me or not good for me. When it comes to grain marketing, we’re trying to help clear the noise with our next-generation marketplace, Combyne, by making it easy to stay on top of the relationships with all of your buyers, in addition to starting relationships with new credit-verified ones.
President & CEO | FarmLead.com