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Interview: Tightest wheat market for years, corn production following price

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As trade tensions with the US make headlines around the world, the wheat market looks set to tighten with top exporter Russia and the US expecting lower crops, while corn acreage claws back some ground on recovering prices.

IEG Vu spoke to International Grains Council (IGC) senior economist Amy Reynolds to get a feel for the major supply and demand stories for the grains sector ahead of the IGC annual conference later this month, and as we approach the 2018/19 season.

The wheat market is currently ripe with weather concerns around the world, are global stocks robust enough to handle a supply shock over the next couple of seasons?
Global wheat stocks are at record levels ahead of the 2018/19 season, and this will provide a buffer against any crop problems. However, based on current crop prospects and projected demand, we could see the first downturn in world inventories for six years at the end of the season. While it is only a small drop in stocks based on our latest forecasts, it does suggest a tighter market outlook. It is also worth noting that around 40% of world inventories are in China, and these supplies are largely inaccessible to the global grain economy. If these are excluded from the world total, the ratio of stocks/use will be the lowest in six years by the end of 2018/19, underscoring that the supply and demand outlook is tighter than it has been for several years.
The growth of China’s hog herd looks to be easing along with demand for pork products – how significant a factor is this in forward demand growth for feed? Is this the end of rapid consumption growth fuelled by an expanding middle class? Might this phenomenon be repeated elsewhere?
Consumption patterns typically change in most countries as household incomes rise, as consumers diversify demand away from traditional staples. In the case of China, this process has been ongoing for many years and has been reflected in consumption patterns for traditional rice and wheat-based foods, in particular toward more protein. However, shifting demand is also apparent in the meat sector. Pork is still by far the most popular meat in China, but the popularity of other meats is increasing, including poultry, beef and fish, which, of course, are also consumers of feedstuffs.
Russia is about to take its position as the world’s largest wheat exporter with record breaking exports. Is the US able to fight back, or has Russia cornered the wheat market? Are there any threats to its dominance?
Aided by bumper harvests, decent quality and attractive prices for delivery to the major buyers in Near East Asia and Africa, Russia is set to be the world’s largest wheat exporter in 2017/18. The pace of shipments has also been assisted by generally favourable weather over the winter, which has helped to limit logistical problems. Russia could potentially be the biggest wheat exporter again in 2018/19, even if the volume of shipments is not quite as large as in the past year. There are some question marks about the upcoming harvest owing to recent dryness, and this could trim export availabilities. In addition, weather conditions might not be so benign over the winter, which could make logistics more difficult and hamper the pace of shipments. The US crop is suffering under adverse weather and we could see one of the smallest harvests there in the past 20 years. Clearly this will tend to restrict the overall size of the export surplus. Nevertheless, demand for premium milling wheats from the US could be relatively strong. Some of the other major producers/exporters of premium milling wheats are also seeing less than ideal weather for this year’s crops, including Canada and Australia.
India looks set to be a demand driver in the wheat industry. The USDA forecasts a reduced Indian crop in 2018/19 and yet the country has just raised its import duty. Is this simply a threat to domestic prices, or could there be an affect in the world stage?
Despite less than ideal weather at times during the growing season, the signs are that India’s harvest was better than many people expected. The latest official estimate is that the 2018/19 wheat harvest was a record. In addition, the carryover of old crop stocks was quite large, nearly double the government’s target for centrally held reserves at the start of the season. The increase in the import duty is a signal that domestic availabilities are ample at the moment. In our latest monthly report, the Council downgraded the forecast for India’s imports to around the same level as in the year before. Nevertheless, global import demand for wheat will likely stay strong in the year ahead, led by continued growth in shipments to Asia and Africa.
Global corn production is expected to rise again in 2018/19, but again outpaced by consumption. Is this a normal fluctuation around the balance point, or a sign of producers struggling to satisfy demand?
Despite sometimes challenging weather, producers have done a good job of satisfying demand in recent years, with the estimated fall in global stocks at the end of 2017/18 only the second contraction in the past decade. Over that time period, world stocks have doubled and the ratio of stocks/use has risen sharply, peaking last season at around 32%, compared with 20% ten years earlier. Ample supply saw average export prices retreat to around 10-year lows. While some of the shortfall in output (vs consumption) in 2017/18 was a reflection of adverse weather, it was also a function of reduced seedings in some countries as producers opted for more profitable alternatives, including in the US. While markets in the past few months have responded to a tighter outlook, some farmers are still preferring other crops, with another fall in seeding expected for the 2018/19 harvest in the US. It is also worth noting that much of the downturn in world stocks is due to demand stimulus in China as the government there attempts to curb inventory growth.

The IGC Conference will be held on June 19-20 and will pose the question “Are grains and oilseeds supplies too heavy to maintain a dynamic market?”

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