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Market comment february 2017

 

Bright spot on the grain market  

The worldwide record harvest with further increasing stores has lost its terrifying grip. Both on the American continent and in Europe, prices on the stock exchanges and the regional markets are again rising slightly. Since the beginning of the year, March wheat has increased by 15 $/t to 164 $/t in Chicago and by 5 €/t to 172 €/t in Paris. Regional markets are following the prices at the leading stock exchanges. In the export ports in the Gulf of Mexico and in French Rouen, bread wheat is trading at 179 €/t and in the Black Sea ports at 177 €/t, i.e. wheat prices have adjusted throughout the world. The positive mood on the wheat market has transferred to the feed grain and rye markets. The outlook for the rye market in the Rye Belt in the coming months is described below.

In its monthly report dated February 9, the U.S. Department of Agriculture lowered worldwide grain production by 5 million tons to 2,077 million tons. This correction has been caused by lower wheat harvests in India (-3 million tons) and in Kazakhstan (-1.5 million tons). At the same time, the U.S. Department expects an increase in worldwide consumption over the previous month by 6 million tons, to reach 2,065 million tons, which has been primarily caused by the increases in consumption of 4.5 million tons in China and 1.5 million tons in the USA. The worldwide increase in consumption of 103 million tons compared to the previous year is quite remarkable, as it once more shows that a worldwide high supply at low prices will attract buyers from around the globe. Because of the correction of production and consumption data, U.S. analysts calculated a decrease in stores from 507 to 499 million tons compared to the previous month's forecast. Compared to the previous year, however, the stores are expected to increase by 12 million tons. The worldwide stores-to-consumption ratio seems to be remaining at a comfortable 24.2 % (24.6% in the previous year).

Distribution of worldwide stores is, however, rather uneven. Following an excellent harvest, the USA will increase its grain stores by 19 million tons in the current marketing year. Stores will increase by 6.5 million tons in Russia and by 5 million tons in China. All the other countries together will decrease their stores by 18 million tons. Thus, 43 % of all stores worldwide are located in China and 19% in the USA. Above all in the importing countries, stores have decreased due to the increasing population. When one excludes the Chinese data from the stores-to-consumption ratio, the worldwide stores-to-consumption ratio will amount to only 16.8% (17.2 % in the previous year).  Chinese stores, which are hard to verify, are available for world market supply only to a very limited extent. The increasing demand of the import countries is also reflected in the increasing global trade, which is expected to increase by 28 million tons to 365 million tons compared to the previous year. We do not want to give you the impression that the world is undersupplied, because the increasing stores in the USA and in Russia, as well as the record harvest in Australia, ensure that the world will be well supplied in the coming months. Certain weather events during the onset of the growth period on the northern hemisphere can quickly change the supply situation.

Low temperatures in the Black Sea region and in the USA have allowed the imagination of stock exchange speculators to run wild. In Montana, snow and avalanches are impeding rail transport. This particularly curbs wheat transportation to the Pacific ports, which makes it very difficult to fulfil export contracts. There is already some discussion whether the USA will be able to achieve its export targets. Looking at the European weather chart, low temperatures predominate in Russia. In Southern Russia, temperatures below -20℃ have been measured in some regions, which is why potential frost damage is already being discussed there. In many regions, wheat has been protected by snow cover. Some parts of the country, however, are said to have seen black frosts. It is definitely too early to speculate about the extent of frost damage. We should not forget that 5% frost damage is deemed normal in the Eastern Rye Belt.

Since the beginning of the year, the price development has varied in the Rye Belt. On the Russian market, prices for wheat and rye have been holding steady in general. In early February, 9,330 RR/t (155 €/t) was being paid for bread wheat, 6,880 RR/t (115 €/t) for feed wheat and 7,180 RR/t (120 €/t) for bread rye. Despite the appreciation of the rouble by 6%, price development on the Russian market was stable compared to the euro in the past weeks. The appreciation is making Russian commodities more expensive on the world market. Compared to feed wheat, bread rye continues to fetch a good price. In view of the expected increase in Russian rye stores from 130,000 tons to 400,000 tons compared to the previous year, this is quite amazing. The current rye price indicates that rye of good baking quality is scarce in Russia. In the Ukraine, rye price development has not been able to keep pace with the wheat market. Since mid-January, the price of bread wheat has risen from 4,530 UAH/t (157 €/t) to 4,850 UAH/t, and that of feed wheat from 4,080 UAH/t (142 €/t) to 4,400 UAH/t (152 €/t). The rye price, however, rose by only 50 UAH/t (2 €/t) to 3,830 UAH/t (133 €/t). Rye is clearly cheaper than feed wheat and thus competitive in compound feed rations. In view of the low stores of 75,000 tons, this comes as a surprise. It is to be expected that rye prices will follow the upward trend of wheat in the coming weeks. It is therefore advisable to wait before selling stored quantities. In Poland, however, a contrary price development can be observed. While wheat prices have been holding steady, the price of bread rye has increased by 40 PLN/t to 595 €/t (138 €/t). The price for bread rye is still 70 PLN/t (16 €/t) lower than for feed wheat, so bread rye continues to be economical in compound feed rations. The price difference is very low for the Polish market. In the past, the price difference ranged from 100 to 150 PLN/t. This indicates that demand is meeting a restrained rye supply. In general, the Polish grain market continues to be supported by exports to Africa from Stettin/Swinemünde and Gdansk/Gdynia. The German market is also influenced by exports from the Baltic Sea ports and Hamburg. Depending on the quality, wheat prices in the Baltic Sea ports range from 175 to 180 €/t. In the Western German consumption centres, too, prices have risen to the same level. Overshadowed by wheat, the price curve for barley and rye is is displaying a slight upward trend. Meanwhile, between 160 and 165 €/t is being paid for bread rye along the River Rhine. In many of the Eastern German production regions, 130 to 135 €/t is being paid ex station for bread rye. During the harvest season, the price was often as low as 110 to 115 €/t. It is to be expected that the demand for rye will remain steady until the harvest. The Danish rye market has been quieter. Following the price increase in December, the bread rye price dropped by 20 DKK/t (3 €/t) to 1,085 DKK/t, while the feed wheat price increased by 20 DKK/t to 1,135 DKK (152 €/t). At the current price difference, bread rye is still too expensive for feeding, while with a price difference of 100 DKK/t (13 €/t) the use of feed rye is profitable.

On the worldwide grain markets and in the Rye Belt, the mood has brightened. In many regions, prices are slightly increasing. Oversupply of the market is hardly ever mentioned nowadays. High stores are mainly located in China and the USA. The supply situation in the Rye Belt is varied. While Russia is expected to increase its stores by 6 million tons, a decrease in stores is expected for the EU 28. Above all in the consumption regions, prices are slightly increasing. Mills and compound feed plants are buying to make ends meet until the new harvest. They are competing with the demand on the international markets. Demand has increased mainly for barley and rye. As for farmers with stores, it is advisable for them to continue with sales and to use minor price peaks to conclude contracts. For great spikes to occur, reports on frost damage from the Northern hemisphere would be required.

Prof. Dr. Reimer Mohr

 
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