With 2013 dominated by a bumper global crop, all eyes are now on South America for early indications of 2014 prospects, reports Nidera’s David Eudall.
Early-year market sentiment is often shaped by development of crops in South America, so analysts have been particularly hungry for news from Brazil and Argentina in recent weeks.
The tail-end of 2013 saw a period of calm in grain markets worldwide, with demand from major wheat consumers such as Egypt being met easily by supply from the Black Sea, France and, more recently, the USA. With demand from major consumers subsequently waning and the global trade remaining willing sellers, prices have fallen sharply in the first few days of 2014.
Relatively benign weather trends across most regions have given little reason for concern. The markets have also remained largely untroubled by January’s polar conditions across most of America.
Last Friday’s USDA report again highlighted the well-supplied nature of global grain markets this season. World wheat stocks were raised by 2.6m tonnes from previous estimates to 185.4m tonnes with increases seen in the USA and China.
US corn production from 2013 was reduced by 1.6m tonnes on the back of lower yields. This, coupled with stronger demand, has cut US corn stocks by 4m tonnes. Despite this, global stocks remain 28m tonnes higher than the previous season.
Often simple conjecture that a major producer’s output could fall is enough to kick life into a becalmed market and, with South America accounting for about 30% of world corn exports and 50% of world soya bean exports, any new year weather events are keenly analysed.
Colleagues in our Argentine office and our weather forecasting team in Rotterdam had been cautious over the dry lead-up to the South American summer. However, since mid-December, rainfall in Argentina has been regular and widespread to alleviate crop concerns.
One region to keep an eye on is the Buenos Aires province, which has been experiencing a decline in soil moisture and still needs to be monitored into February.
Brazilian crops are healthier than a year ago and although conditions in the north of the country have been drier in recent weeks, this is unlikely to affect crops too much as soya beans are nearing maturity and early harvest is already taking place.
One potential area of crop stress is the region of Mato Grosso do Sul, which accounts for 7% of national soya bean output. The local producers’ association estimates 10% of the state’s soya bean yield has been affected by dry weather.
Detrimental weather affecting South American crops is really the last factor that could dent global supply this season. Apart from some pockets of poorly developed crops that could come under pressure from future weather events, new year rain is greatly improving overall crop prospects.
With no genuine threat of reduced crop production in the southern hemisphere and few worries over crops planted for 2014 harvest, global markets remain relatively stable.
The old-crop market is losing steam and new-crop weather conditions are generally good, so there are very few reasons for a prolonged market rally in the short-term.
Effect on the UK
UK markets have followed European values down at the start the year and are likely to remain under pressure through the rest of winter as corn from the Black Sea continues to undercut wheat for feed rations.
Any harsh winter weather is yet to affect UK crops and a period of drier weather could give good opportunities for early spring planting on lighter soils.
As the 2013-14 season has progressed, there has been a greater pull for grain to move north and west as deficit feed wheat areas start to increase prices to attract supply.
By and large, however, prospects of any significant lift in grain prices over the next few weeks are remote.
Grain market drivers
Red: Factors putting downward pressure on prices – accounts for 50% of market influence
Corn continues to compete into feed rations throughout Europe across old- and new-crop positions. US and global balancesheets remain heavily supplied so markets are weighed down. In addition, global weather is giving few threats to developing crops.
Amber: Watch this space – 30%
European snow cover remains thin. Although temperatures are mild, a sudden switch to freezing temperatures will adversely affect crop development. Further demand from global consumers to finish their seasonal buying requirements is also likely – these factors could give short-term spikes in prices.
Green: Factors exerting upward pressure on prices – accounts for 20% of the market
Global investment funds continue to hold large sold positions so any period of buying to take profits on these will add support to the market.
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.