AGRAVIS market report

A current assessment of the 2019–2020 harvest

The 2019–2020 harvest season has begun. Jost Schliep from the AGRAVIS Agricultural Products Division provides an initial assessment of the market situation.

The price expectations for the 2018 harvest sharply reduced due to drought were not met until the end of the year. Grain prices dropped significantly contrary to all expectations from February 2019. Wheat on the Paris Futures Exchange lost around 20 euros per tonne and has levelled off since then at around 180 euros. Maize lost about 15 euros per tonne and stopped at 165 euros while rapeseed has declined by 10 euros per tonne. The premiums for physical grain also slumped by around 15 euros per tonne.

Current situation: wheat

The global harvest forecasts for both wheat and maize continue to be good. Despite the significantly poorer wheat harvest in the European Union and Russia in 2018, Russia just about managed to retain global closing stocks and clearly holds more than a third of consumption requirements. As the campaign drew to a close, the lower harvests in Russia and South America were compensated with proportionally lower consumption. Consumption must increase again to keep the balance almost stable with an anticipated significantly higher supply from the 2019 harvest due to high increase in acreage and normal harvests. Cereal acreage has increased significantly in all key producing regions, which should result in a more comprehensive supply. The weather over recent months in particular has led to high expectations for the harvest in Ukraine and Russia, as in 2017–2018, which will put EU crops under great pressure.

Current situation: maize

Although the United States Department of Agriculture (USDA) forecasts a reduction in global maize stocks of 26 million tonnes, supplies of maize also appear to be at a comfortable level. First of all, the harvests in South America are approaching new world record levels after poor preceding years. Secondly, despite the wet weather, the north-west US anticipates 92 million acres of sown surfaces. This will produce a better overall harvest than the previous year, even with an average yield of 170 bushels per acre. In the US, ethanol consumption is promoted by government, yet has failed to meet expectations. However, it is on the rise and carry-in will reach two billion bushels for the new season. The sowing conditions in Ukraine and Russia are currently excellent and a good harvest can be expected once more, even if we can’t really expect last year's bumper Ukraine harvest of 35 million tonnes to be repeated. The EU will also be able to harvest significantly more maize with similar quantities to 2017–2018, thus reducing import requirements sharply.

Current situation: rapeseed

Despite improved yields, the rapeseed harvest in Germany and the rest of the European Union is unlikely to exceed quantities from preceding years due to the significantly smaller sowing area. In Romania and Hungary in particular, stocks ran lower due to dry conditions, after having a better start to the year. In contrast, a record harvest of more than three million tonnes is currently anticipated in Ukraine with exports of over two million tonnes expected, which will be supplied to the EU only for the time being.

The current circumstances for bio-diesel are impeding ever-growing demand since Germany's admixture limit of seven per cent has virtually been reached while overall diesel consumption has stagnated. If the economy should slow down over the coming months and truck traffic decline, the use of bio-diesel and, consequently, the demand for rapeseed oil will be directly affected. Moreover, the continued favourable global soya balance with record stocks equalling almost a third of annual consumption has hindered some price rallies for rapeseed.

If the forthcoming harvests perform as normal or well without any severe weather conditions, the prospects for an increase in prices look modest, at least for the first half of the harvest year 2019–2020. A highly appealing market can only be expected if the dry spell of recent weeks continues and causes major failures, particularly in the Black Sea region and the EU. Until then, small upward movements in the weather-dependent market can be regarded as sales opportunities.

What could move the markets over the coming months?

There is a saying which states that the weather and politics drive markets.

Weather-related influences

Indeed, we need to get through the crucial growth stage before the anticipated rich harvests are reaped in the northern hemisphere. The current prolonged drought in Europe might provide an initial indication. If the high pressure areas take hold as they did in 2018, there are likely to be reductions in yield. Future rainfalls will thus become crucially important, i.e. we need to keep a close eye on precipitation in the months of May and June. In the US, the weather will decide in May at the latest whether the 92 million acres of maize can actually be sown or whether maize must give way to the later soya bean instead.

Politically driven influences

Political uncertainties subjected prices to massive pressure from May 2018 despite the weather-related poor yields.

The tariff dispute between the US, China and the EU since May 2018 has an impact on all markets and continues unresolved despite hopes of settlement. The tariff dispute with China primarily affects maize, ethanol and soya beans; significant recovery of prices are not expected until an official agreement is reached. It is currently virtually impossible to estimate how soon an agreement might come. The US presidential election is scheduled for November 2020 with the primaries starting in February 2020. The positive effects of an agreement need to be noticeable by then, if not before. This should favour a deal by the summer, which could have a positive effect on prices in the short term.

The differences between Canada and China due to the arrest of Huawei CFO Meng Wanzhou has led to a ban on canola rapeseed imports to China. This, in turn, has a negative effect on the price of EU rapeseed as Canadian export quantities are applying pressure elsewhere in the market and are also being increasingly processed in the EU despite problems with GMOs if the price pressure is great enough.

The recent US Environmental Protection Agency's decision to exempt smaller and medium-sized mineral oil companies from their obligation to add ethanol (what are known as "waivers") is slowly but steadily reducing US maize consumption.

The imminent tariff dispute between the US and the EU as well as a delayed Brexit may cause unexpected shifts in exchange rates, which will have an impact on cereal prices and make potential price forecasts difficult.

Conclusion

All in all, from today's perspective, global cereal and rapeseed supply will remain easy to manage in 2019–2020 and will maintain pressure on prices. Only prolonged weather problems or upcoming political decisions might give a positive boost in prices.