Black Sea uncertainty’s yo-yo effect on grain market

ANOTHER mixed bag of weather with sufficient rain for autumn sown crops and relatively mild weather for them to thrive, has meant that the countryside is looking well and in good fettle going into winter.

Last week, the AHDB published its 2022-23 ‘Early balance sheet’ for wheat, which gives a first look at supply and demand for the coming season. Wheat production is estimated at 15.66m tonnes, which is 12% up on last year due to higher yields.

With a larger tonnage this year, full season imports are expected to drop this time to 1.225m tonnes, which would be 769,000 tonnes down year-on-year.

Total usage of wheat is expected to increase by just over 0.5m tonnes to 15.224m tonnes, due mostly to 450,000 tonnes being used by the bioethanol sector for power. It is being assumed that the two UK bioethanol plants will be operating in England which will see wheat use increasing this season, as maize is currently not competitively priced against wheat.

Wheat in animal feed is also expected to increase, although with the late season grass growth and milder weather, this had so far allowed stock to stay outdoors for longer than usual.

The increase in wheat use is not enough to outweigh the rise in availability, which has led to a balance of 3.511m tonnes – that’s 31% up on last year. With an operating stock requirement of 1.5m tonnes, this leaves an exportable surplus of 2.011m tonnes which is more than double the amount of 2021-22.

Commodity markets have been highly volatile due to both the political situation in the UK affecting currency and the ongoing war in Ukraine. In the middle of October, in one day the November, 2022, Liffee feed wheat future mark rose by £10.95– the largest daily gain for this contract since July 8.

On October 11, November futures stood at £293.20 and as I write this on October 17, only two weeks later, the same futures contract is down £28.20 per tonne to £265. Also on October 11, the May, 2023, futures contract had gone from £302 per tonne down to £282 per tonne.

Another important factor is the agreement which allows exports from the Black Sea which is due to expire at the end of next month. There has been some discussion to extend this arrangement but so far it has still to be agreed.

If it is extended, then we could see supply concerns ease again and prices could ease further. As of October 11, 304 ships had carried around 7m tonnes of grain and other foodstuffs from Ukrainian ports since the grain corridor agreement had been signed at the end of July.

The uncertainty about knowing whether this agreement will continue is causing volatility, but we are told that it should be known soon if this arrangement will continue, but Putin blamed the attack on the Kerch

Bridge, which links Russia to Crimea, as a reason not to renew the existing shipping agreement.

Last week, the latest HMRC trade data was released and from July to August, 110,800 tonnes of wheat had been exported from the UK. This is up 81,000 tonnes from the same period last year.

It is estimated that Russia will have exported 4.4m tonnes of wheat in October and if correct, that will take total exports for the season so far to 14.3m tonnes from an expected 47m tonne surplus.

There is speculation, however, that an all-grain export cap of 26.5m tonnes will be implemented in Russia which will last from mid-February, 2023, until June, 2023, even though Russia has produced a record wheat harvest estimated to be in the region of 100m tonnes.

For next year, both Ukraine and Russia will have smaller crops which will see their export market share drop. Russia is looking at a provisional tonnage of 85m tonnes of wheat in 2023 due to adverse weather delaying normal winter wheat planting, which also applies to the Ukraine.

Up to the middle of October, only 2.5m ha had been planted, which is half that of last year by the same date. Ukraine is reducing its planted area from the 6m ha planted last year down to 4m ha this year, which is not only due to adverse weather but the ongoing Russian occupation.

US wheat production has been reducing since the 1980s due to the increase in maize and soyabean production, but it is still the fifth largest producer and exporter of wheat this season, amounting to 6% and 10% of output, respectively.

Some 47% of US wheat production from this year’s harvest is expected to go for export and for next year current wheat planting progress is estimated at 69% complete, or just slightly above the five-year average. The US does, however, have severe to exceptional drought issues at present in Oklahoma and Kansas, where nearly 35% of total US wheat is grown.

Heavy rain on the east coast of Australia has been giving farmers there quality concerns, however the second largest national wheat crop on record is forecast at 32.2m tonnes this season.

Argentina is suffering drought due to a La Nina weather event once again, which has seen its wheat crop downgraded to 49% ‘poor to very poor’. Frost has also been an issue in a forecast wheat production reduced to 16.5m tonnes.

This weather has also affected their maize yields and there is a 75% chance of a La Nina event from December to February. Six out of eight of the last La Nina weather events have occurred between 2007 and 2021 and has dropped yields below forecasts and in 2011 and 2017 yields were down by 21% and 25%, respectively.

Argentina is an important global producer of maize, exporting 37.5m tonnes in 2021-22 which accounted for 18.5% of global maize exports. For the 2022-23 marketing year, it is expected to produce a crop of 50m tonnes and exports are forecast at 41m tonnes.

Currently, Argentinean maize plantings are estimated at 17% complete and due to the recent dry weather, this is down 9.3% compared to the same time last year. Given the impact of La Nina going forward, this could mean that any forecast tonnage for next year could be reduced.

Maize yields in the US have been cut to 4.34t/acre, which has meant that US production has been revised down to 352.95m tonnes, resulting in world end stocks being reduced accordingly to 301.19m tonnes. So world production is seen almost 4m tonnes lower at a total of 1168.74m tonnes, or 48.5m tonnes down on last year’s output.

AHDB early balance sheet for barley has projected it to increase this year by 276,00 tonnes to 2.075m tonnes. Despite being higher on the year, the balance remains slightly below the previous five-year average.

Considering an operating stock requirement of 800,000 tonnes, this leaves an exportable surplus of 1.275m tonnes, or 347,000 tonnes more than last year.

Total availability of barley this season is expected to be 120,000 tonnes higher than in 2021-22, at 8.22m tonnes, due to a rise in production. This is estimated at 7.190m tonnes, which is 229,000 tonnes up on last year due to higher yields even though there has been a lower planted area.

Despite a projected rise in use by the brewing, malting, and distilling sector, a fall in animal use has led to the total domestic consumption of barley to drop by 155,000 tonnes from last year down to 6.154m tonnes.

Demand for barley in animal feed is expected to fall by 5%, or 196,000 tonnes, due to the pressure on markets in the livestock sector which has arisen as a result of rising feed costs. It’s also down to the fact that barley has not traded at a wide enough discount to wheat, which is now beyond £20 per tonne.

Barley prices have dropped by around £20 per tonne from where they were two weeks ago due to this larger crop combined with lower domestic demand. That means there’s a surplus of feed and malting barley looking for a home.

‘For next year, both Ukraine and Russia will have smaller crops which will see their export market share drop. Russia is looking at a provisional tonnage of 85m tonnes of wheat in 2023’