Global grain trade is dominated by oversupply but recent price spikes show just how volatile markets are, writes Nidera trading director Stuart Shiells.
The world is awash with wheat, with near-record harvests in most parts of the world in 2015 adding to the carryover from last year.
Against this backdrop, you would think that continuing pressure on prices would be inevitable, but the recent, albeit limited, recovery shows just how quickly markets can react to supply speculation and shifts in demand.
Generally benign conditions through the early part of the growing season led to prices gradually reducing.
However, there were concerns over the development of Canadian crops, wet weather delaying the start of the US harvest and dry weather stressing European corn crops.
Subsequently, however, conditions were almost perfect for wheat production.
The Canadian wheat crop did see an 11% reduction to 26m tonnes and the EU corn crop’s fall of nearly 18m tonnes contributed to an overall 36m-tonne drop in global corn production.
But last year’s corn crop was a record, leading to a massive carryover of stocks, and global wheat production this season is huge. Even the feared El Nino weather didn’t initially live up to expectations.
The US Department of Agriculture (USDA) forecasts near-record crops for the former Soviet Union, with Russia’s 2015 wheat crop at 61m tonnes and Ukraine producing 27m tonnes. The EU wheat crop is another near-record, at 155m tonnes.
Drawing all this together, world wheat end-of-season stocks for 2015 look like rising by 16m tonnes on 2014 (+8%) and world corn stocks look set to fall by 8m tonnes (4%).
Effect on the UK
Latest reports put the 2015 UK wheat crop at 16.1m tonnes but some think it could be as high as 16.7m tonnes.
Either way, it will be the second largest crop in the past five years.
Furthermore, we have a huge carry-in of nearly 3m tonnes from last year and it looks as if there will be a similar amount from harvest 2015, giving about 5m tonnes available for export and carry-out.
With strong competition from other EU origins, UK wheat needs to be price competitive throughout the season to ship the large surplus.
That said, demand for EU wheat is strong and prices have rallied in recent days as the industry reveals its lack of grain cover for manufacturing and processing.
The overwhelming effect of the large worldwide harvest and significant grain stocks will dominate markets in the short term, but the lowest of the lows could be behind us.
Volatility will remain and could give the UK farmer opportunities to make better prices than seen recently.
While the fundamental fact of a big world wheat crop dominates markets, recent weather concerns and growers refusing to sell grain are making markets nervous, showing how easily they can be unsettled.
Recent weeks have seen dry weather in Russia and Ukraine lead to fears of delayed planting and poor establishment.
Australia has also been drier than normal, with recent estimates reducing the wheat crop to 24m tonnes compared with relatively recent estimates of 26m tonnes.
These factors have scared the market and kept prices supported. But other elements have contributed, too.
Feeling that prices could fall further, buyers have not wanted to build large stocks, and many now have very little cover. At the same time growers have sat tight, not wanting to sell at these levels.
The end result is a kind of global stalemate that will undoubtedly be resolved, but in the meantime a subtle shift of power towards the producer has resulted.
Global markets are always pivoted on the relationship between supply and demand, and while the massive supply is undeniable, such fluctuations can be very disruptive.
As ever, speculation over what might happen has as much of an impact on markets as the day-to-day reality.
How these fundamental supply and demand drivers play out over the next quarter is yet to be seen but significant spikes in grain price could well be an ongoing feature of markets in the coming weeks.
Grain market drivers
Red: Factors putting downward pressure on prices – accounts for 40% of market influence.
Huge global wheat crops mean that the world is oversupplied with wheat and stockpiles keep increasing. The EU has its second biggest crop on record and needs to compete with cheap supplies from Black Sea countries.
Amber: Watch this space – 30%
We are yet to see final results of southern hemisphere harvests. For example, to what extent will recent heat affect yields in Australia? Market attention will increasingly turn towards crop development elsewhere, with any weather problems likely to result in sharp price reactions.
Green: Factors exerting upward pressure on prices – 30%
Consumers and traders have been expecting prices to keep falling, but recent weather has created a certain amount of market concern and unearthed demand. This could continue until we see sellers step back into the market and an improvement in weather.
Nidera UK is part of global grain trader Nidera, which operates in 22 countries. One of the UK’s key grain exporters, it is based at Ipswich, Suffolk, with regional offices in Yorkshire, Norfolk and Hampshire.