Grain price outlook: Decline in demand holding markets down

In the previous Global Grain Insight, published in the middle of February, we concluded: “If coronavirus continues to spread, it could have a negative impact on the whole global economy.”

While that sentiment has proved correct, none of us could have imagined the extent to which the virus has affected our everyday lives, as well as the markets and wider economy.

Markets at this time of year usually have their eye on the weather, with any hint of unfavourable conditions giving support to prices, but while the world is not without these, the crushing destruction of demand from coronavirus is all-pervasive.

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With a world in lockdown, little travel taking place, hospitality mothballed and minimal global trade, markets are at a standstill.

Without coronavirus, grain markets would be looking very different.

Much of western and central Europe has gone from being too wet to too dry, and although recent rains have helped to stabilise conditions, estimates still put EU wheat production down 12.5m tonnes from last year to 134m tonnes for 2020-21.

Influence of main price factors

Red: Factors putting downward pressure on prices – 45%
Accounts for 45% of current market influence. Demand destruction due to coronavirus is outweighing any current supply hitches in wheat, with availability of low-cost maize aggravating matters.

Amber: Watch this space – 40%
Short-term weather changes could inject volatility into markets. Continuing dry weather in key markets such as the EU, Brazil, Russia and the Ukraine might still unsettle things. But for any long-term effect, they’ll have to be sizeable.

Green: Factors exerting upward pressure on prices – 15%

Current weather issues are enough to keep prices from falling too much, but so far, they are not sufficient to outweigh coronavirus and initiate a sustained rally.

Drier-than-normal weather in the main corn-producing states of Brazil has affected yield potential, and this could drop further if these conditions persist. It is a similar picture for wheat in southern Russia and the Ukraine, where rain is also needed.

That said, Russia is expected to produce 77m tonnes of wheat this year, compared with 73.5m tonnes in 2019-20.

Australian production is expected to rebound from last season’s drought-hit wheat crop of just 15m tonnes to more like 24m tonnes, and US maize plantings are well ahead of average.

Demand for maize, particularly for ethanol, has fallen dramatically, however, and the abundance of cheap maize is adding pressure to all grain markets.

Further weather problems could inject additional volatility into markets, resulting in short-term selling opportunities. There is also encouragement to be taken from some countries seemingly getting a grip on the virus and lifting restrictions.

But for the foreseeable future, nothing short of a major weather event will lift the weight of coronavirus sitting on global markets. Until demand returns, upside potential for markets is limited.

UK prices dictated by global events

UK price prospects have for some time now been driven by global events, with the reduction in domestic wheat production already well known in the market.

Current estimates put UK wheat production for the coming harvest at about 10m tonnes – a substantial drop from the 16.2m tonnes last year. The effect of this, at least in part, is likely to be offset by record carry-over stocks approaching 3.5m tonnes from the current season.

It’s a different scenario for barley, with a record crop predicted. That, in turn, brings with it the need to find export markets and that could be more challenging than normal in these difficult times.

Spain, usually a sizeable destination for UK barley exports, has experienced considerably better weather than many other parts of Europe recently and looks set to produce bumper crops this year.

This could mean a large proportion of UK barley exports must find their way into third country markets, which could prove challenging due to the lower moisture contents required.

With the UK set to leave the EU at the end of December, we could also see a repeat of last season, with growing pressure to export barley ahead of this deadline.

This heavy domestic barley supply, plus the prospect of sizeable maize and wheat imports, mean it is difficult to see how UK wheat prices can rise without global prices going up too.