Wednesday, July 18, 2018

Will a US-China trade war trump grain market fundamentals?

June 29, 2018 by  
Filed under News & Business

A long-awaited upturn in the grain markets is under threat from Donald Trump’s international trade policy, says Cofco UK trading director Stuart Shiells.

“Markets have been characterised by a long period of relatively flat trade with the International Grains Council (IGC) six months ago forecasting the second highest level of world grain stocks on record.

“Consequently, the benchmark wheat futures markets of Chicago and Paris were languishing at levels that fully reflected this oversupply scenario.

“But in recent months, markets have strengthened by about 15% – a rise of around £20 per tonne in UK ex-farm prices – mainly driven by lower production forecasts caused by increasing demand and adverse weather in key production regions.”

According to the IGC, this will result in the first contraction in world grain stocks since 2012/13, he points out.

“In the US, heavy snow in the northern Plains and excessive rains in the Midwest delayed the start of Hard Red Spring (HRS) wheat and corn plantings.

Dry conditions

“Conversely, conditions in the southern Plains were too dry for the Hard Red Winter (HRW) crop, resulting in historically poor crop condition ratings.

“In addition, excessive dryness for Brazil’s Safrinha corn crop has caused some analysts to cut total corn production there to as low as 82m tonnes versus the United States Department of Agriculture’s initial forecast of 92m tonnes.”

In the key Black Sea region, a relatively benign winter has given way to mixed spring and early summer weather, adds Mr Shiells. “There’s been recent dryness in Ukraine and especially southern Russia with ongoing delays to spring plantings in Siberia impacting on production there as well.

“In western Europe, grain production potential in Germany, Poland, Denmark and the Baltic states will also have been reduced by warm, dry conditions.”

However, despite all the talk of lower production, the USDA’s own estimate of world wheat stocks released in June actually rose by two million tonnes to more than 272m  tonnes, he says.

“The USDA put Russia’s crop at 68.5m tonnes but the industry believes this will be higher at 72m tonnes.”

Further price rises

If all the concerns in different countries deliver their full consequences then prices could have further to rise, he says.

“But the reality is that the old adage of ‘buy the rumour, sell the fact’ – that things rarely turn out to be as bad as expected – tends to hold true.

“Many would argue that, some damage to 2018’s global production potential has clearly been done, but the effects of this are really already priced into the market.”

Normally, so long as northern hemisphere crops remain unharvested, there is hope that prices could rise higher still, but these are not normal times, Mr Shiells concludes.

“President Trump’s recent threat of tariffs against China has rattled equities, foreign exchange and commodities, as well as the grain markets.

“Growers longing for prices to return to the heady heights of five years ago, will now have not only the fundamentals of supply and demand to contend with but politics as well.”

Stuart Shiells is trading director for Cofco International UK – formed by the merger of the former Nidera and Noble Agri names worldwide.

www.uk.cofcointernational.com

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