Grain stocks tighten but US to cap upside

Grain stocks tighten but US to cap upside


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The grains industry is coming to terms with a marked drop in supply this season due to drought in Australia, the EU and the Baltic States.

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Bill Lapp, Advanced Economic Solutions, says global wheat prices are likely to rise further but said a good US season would place a cap on upside.

Bill Lapp, Advanced Economic Solutions, says global wheat prices are likely to rise further but said a good US season would place a cap on upside.

ALMOST all the major wheat producing regions but North America are faced with below average crops this season, creating real impetus for rising prices according to a US-based grain industry analyst

Bill Lapp, principal of Advanced Economic Solutions, which has its headquarters in Nebraska, told the Australian Grains Industry Conference (AGIC) earlier in the month there was scope for further rises in price due to issues with the Black Sea and European Union crops and the likelihood of markedly lower Australian production.

However, he said the US wheat crop was in reasonable condition and with the US corn crop also in ruddy health there would be a cap on how high markets can rise in spite of the International Grain Council recently forecasting a five year low for world wheat production this year.

“We are moving from a period of large surpluses to tighter supplies, however the combination of remaining US stocks and the potential for reasonable production there means I would estimate any upside to be capped at around $US6 a bushel,” Mr Lapp said.

Currently, near contract September futures on the Chicago Board of Trade are at US562c/bu, following a price rise of between 15-20 per cent over the past month.

Rory Deverell, INTL FCStone, says the northern European and Baltic State wheat crops will be well down this year.

Rory Deverell, INTL FCStone, says the northern European and Baltic State wheat crops will be well down this year.

Rory Deverell, senior commodity risk manager with INTL FCStone, based in Ireland, said the drop from both Russia and northern Europe would be felt by the market.

“I don’t think market fully grasps how bad parts of Russia have been,” Dr Deverell said.

He added the cut to production in the Baltic states, such as Latvia and Lithuania, was also severe and would have a direct influence on markets where Australia can sell wheat.

“Saudi Arabia sources a lot of its wheat from the Baltic region or northern Europe and the premiums in those markets at present opens the door for both Australia and Russia.”

However, he agreed with Mr Lapp a full worldwide drought market was unlikely to emerge.

“It’s not going to be another 2010, there are parts of Russia that are not too bad due to good moisture ahead of the planting, on its own it won’t be a solution for tight supplies but it won’t necessarily add to the problem either.”

“I’d estimate yields are down 15 per cent year on year, it’s a lot, but it is not 25pc, I’d estimate a Russian wheat crop of 65-70 million tonnes.”

Mr Lapp said with crops at a critical developmental stage in both the northern and southern hemisphere there had been some big yield losses of late.

"The dry has meant we have lost five, ten, maybe even 15 million tonnes off the world wheat crop in the last 10 days or so," he said.

Mr Lapp said investors had changed their fundamental thinking on the world crop reflecting the growing scarcity of supply.

“The funds are in the process of changing their positions to reflect the landscape.”

“There is a lot of drawing down on inventories and that is very supportive of pricing.”

However, he said corn would place a handbrake on how high wheat prices can go.

“Corn in the US is certainly better than we thought earlier, with yield estimates around that 176 bushels an acre mark.”

“Corn prices are the lowest they have been for several years and that will cap how high the wheat market can go.”

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