From Russia with love

Writers Posted 13/01/15
As we enter 2015 it is worth noting that Russia has provided most of the fun in grain trading in the last year.

An otherwise becalmed market was livened up in March/April when Russia invaded parts of the Ukraine. But that all subsided as the world went on to produce record crops of wheat and maize.

Over the past month there have been reports of the poorly established Soviet wheat crop with a lack of snow cover and many hectares may need to be replanted with spring crops that have a much lower yield potential. But there is a more immediate problem for Russia: it has just announced a grain export tax. It had been expected, but we still don’t know if it will apply to new export sales, or retrospectively; and whether it will be for old crop only or will go into the new harvest as well.

Russia now has a perfect storm of problems. Internally food prices are rising and inflation is about 17%. The rouble has devalued around 40% against the United States dollar since the summer. It desperately needs hard currency, but it cannot really export anything. Because of the plunging oil price it cannot compete with the Arabs, some of whom are prepared to keep producing and exporting oil down to $20 per barrel. The same applies to gas or course: these are Russia’s biggest exports.

Now it is restricting – by this tax – grain exports as well. It has banned most food imports from western countries, as retaliation for economic sanctions. Ironically the only industry which is thriving is pig meat production. Its biggest customers are the emerging economies in North Vietnam and Korea – both good old communist friends.

So I guess restricting grain exports will fit with the need to use more barley and wheat internally to keep this going. Either way, Russia has big problems which will not go away any time soon, so it will continue to provide the stimulus which creates volatility in our markets.

In the middle of December our wheat futures market jumped £7 per tonne in about half an hour, all because of Russian rumours. By the end of the day it was more or less unchanged, and most traders blinked and missed it. That apart we are still £6 up on wheat in the last month. So we have now seen an increase of 35% in wheat values since its low point, under £100 at the end of September. That is truly amazing when you consider the UK also had a record wheat crop. In fact the highest year on year increase since 1892! If you try and ignore Russia for a moment – which is difficult – all strategic world stocks of grain and oilseed will have increased by the end of the season in 2015. So, I would still advise farmers to continue selling into the current old crop rise in the market.

Interestingly the low price of oil is having contradictory effects upon grain and oilseeds. Firstly, its never been cheaper to charter a 60,000 metric ton vessel to send our wheat and barley to the other side of the world, so that is good news. But, you would have thought that the low price of oil would have had a detrimental effect upon ethanol production and maize usage in America. But it hasn’t.

Far from it: ethanol production in the US has increased, all because they have a mandatory 10% inclusion rate of ethanol in petrol. So as the price of oil falls, petrol usage has increased, and with it the inclusion of ethanol. America is even exporting ethanol to Brazil where sugar is more valuable as sugar now, rather than turning it into fuel.

However, the effect of the low oil price may be more detrimental upon the bio diesel industry in the European Union. Palm oil tends to be the base price for oil vegetable oil products, and it is cheap just now. So adding that to the low price of oil is not good news for the oilseed rape market; weaker sterling is the remedy for UK oilseed.

So, the Russian roller coaster is leaving us on quite a high point for old crop wheat. The EU have issued a record tonnage of wheat export licences, but then they needed to. The US are the same, being two million tonnes ahead of last year’s exports. Stock will be rebuilt and in areas where you can actually get hold of it, if you need to, like America and the EU. So keep selling old crop wheat, the barley will take care of itself, oilseed needs the stimulus of weaker sterling, by which time the reduced planting in the UK and EU may have an affect also.

New crop is more challenging. The world has had two consecutive record crops of everything except barley. Low prices should mean lower plantings of wheat and maize in some key production areas. Demand has not matched supply in the last two years, but that may not be the case in 2015. So, I think it’s best not to count on a third successive record crop in the world. New crop wheat touched £140 for 2016, not a bad price to be wrong at, but I would not rush to sell at less.


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