All eyes are on China’s unpredictable demand, complex trade talks and the uncertainty over coronavirus, says COFCO UK trading director Stuart Shiells.
Despite the relative calm of global weather and production prospects, the current unwelcome events in China could well and truly disrupt the entire commodity picture.
It was all very different just a few weeks ago. Grain markets found support from mid-December, with prices driven by strong cash markets and logistics-related supply issues in France.
Coronavirus hits markets
However, this all came to an abrupt halt towards the end of January, with markets getting overcooked and coronavirus becoming the word of the moment.
With speculative funds holding long positions, wheat markets were vulnerable to a sharp sell off, with news of the virus leading to them quickly reducing their exposure as they feared potential impacts on global demand.
But the virus is not the only issue in play. China/US trade tensions have been unsettling markets in recent years, so traders were relieved and assured by the signing of the phase one trade deal between the two countries.
In fact, a large part of the new year rally in prices had been on the back of this but, so far, there has been little evidence of it resulting in China buying more of the US agricultural products to which is has committed.
US-China trade agreement
China’s ability to conform to the agreement is now being complicated by the negative impact of coronavirus on its economy.
To control the spread, large portions of China’s economy have been shut down, with inevitable implications for commodity use.
Despite little progress with drilling in the UK, on the global supply side there seems little to worry about. Weather remains relatively benign with few implications for grain production worldwide.
Australia is finally receiving welcome rains, which is helping sentiment, giving hope for better crops next season.
In the Black Sea, Ukraine and Russia snow cover has helped protect against recent sub-zero temperatures, with only minor winterkill reports.
More Russian wheat next harvest
While next season’s EU wheat crop is forecast to be about 7m tonnes lower than last year’s, the 2020/21 Russian wheat crop is estimated at 80m tonnes compared with 73.5m tonnes for 2019/20.
These numbers add interest to markets but the real momentum lies with China. If coronavirus continues to spread, it could have a negative impact on the whole global economy.
The UK faces its own problems
While UK grain markets have benefited from sterling’s weakness due to Brexit uncertainty in recent times, the pound has now strengthened against the euro, making UK exports uncompetitive and reducing the benefit of the stronger global grain market tone.
Since the end of October, fresh UK export trade has been minimal and the chances of shipping this season’s large surplus looks increasingly unlikely. A record carry out is almost inevitable.
Higher new crop prices
Due to the delayed autumn drillings, new crop wheat prices have been pushed higher, with the prospect of a tight 2020/21 season and a return to the UK being a net importer.
This likely tight scenario has created a large spread between old crop and new crop prices, which is now priced in, with November 2020 futures in London at a premium to the Paris market’s milling wheat contract requiring 220 Hagberg and 11% protein.
Currently there seems little scope for this premium to widen further. The relative strength of new crop prices has encouraged growers to store grain into next season, which has contributed to the slow pace of old crop exports.
Domestic wheat output will be significantly reduced next year and consumers are already looking at increasing imported maize as a substitute for wheat. However, the UK barley crop could hit another new record.
With the likelihood of large maize imports, a big barley crop and a record wheat carry over, the impact of next season’s small wheat crop will be reduced.
Any potential upside in prices will be limited without additional global market support.
A summary of the current main price factors and their probable influence
Factors putting downward pressure on prices – accounts for 30% of current market influence
Comfortable global grains supply and demand balance with no serious weather issues despite the low rate of UK drilling.
Watch this space – 50%
The trade is eager to see what happens with Chinese buying and coronavirus developments. With lower plantings in western EU, weather will be a major focus.
Factors exerting upward pressure on prices – 20%
A strong export pace and good demand for French wheat is keeping EU prices underpinned.