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Wednesday, August 17, 2016

Too much grain in the world

By Andrew Whitelaw  |  Source: USDA

Key points

  • Wheat end stocks were further reduced by 0.3% month on month, however are up 4.5% on last year.
  • Corn end stocks were raised by 6% month on month, giving a 5.5% increase on the previous year.

2016-08-17 GRAIN FIG 1

2016-08-17 GRAIN FIG 2

The USDA released the World Agricultural Supply and Demand Estimates (WASDE) for August. The report however did not provide the support required for a market rally. This short report will look at the forecasts for the world wheat and corn crop.

Crop forecasts, like any other forecasts, are just a prediction. Therefore, it’s worthwhile reading our article published last month asking ‘Are crop forecasts a load of old bulltish?’ to keep some perspective when reading forecast reports.

In relation to wheat the report was neutal-bearish, with unfortunately little in the way of impact on prices. The global wheat crop was projected to increase by 4.9mmt from the July projections, however this is somewhat offset by a 9mmt reduction in the EU. The increase has come from increases in the Black Sea, Australia and USA.

The Russian crop in particular has received a 7mmt upgrade, which will lead to Russia being the largest wheat exporter this year at 30mmt of exportable surplus. As expected the USDA increased the Australian crop to 26.5mmt (+1mmt), which is unsurprising given the favourable weather which many have received.

In order to keep a positive spin on the numbers, we can see that in the past four seasons the world has had considerably more supply than demand, however that spread is narrowing (figure 1). However, it was pointed out in last month’s update on the WASDE that this increased consumption required prices to remain low.

In corn we see further increases in production with a 1.7% increase month on month. The global corn crop will be the largest on record, however many forecasters have commented that they believe the yield estimates for the US are too high. It is quite clear however that even with some fine tuning of corn yields this is still a bumper crop (figure 2).

The overall picture is not attractive for prices, with both corn and wheat end-stocks predicted to be at extremely high levels. The market now has little in the way of potential production issues between now and the Australian harvest, limiting the upside potential for prices however hopefully placing a floor in the market.

What does this mean?

The USDA report has largely backed up what the industry was expecting, the world is sitting on too much grain. The hope for something to go wrong and provide the impetus for a rally in prices is largely fading.

It is important that farmers create a strategy for a low priced environment. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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