EU wheat prices have 'limited downside' - especially given French woes

24.05.2017

European wheat prices appear to have "limited" downside, despite the prospect of another strong harvest from rival Russia, INTL FC Stone said, flagging cause against pessimism in rapeseed prices too.

Russia appears poised for a wheat harvest of some 65m-70m tonnes this year, given strong sowings of higher-yielding winter crop by "well capitalised" farmers, and benign conditions.

"Farms are seeing rains at the moment down in southern Russia," the key source of the country's wheat exports, Jaime Nolan Miralles, FC Stone commodity risk manager, told Agrimoney LIVE.

However, with Black Sea wheat prices already low, traders were "expecting there to be about $10 a tonne further downside this year" in values in the region, Mr Nolan said.

"At $165 a tonne, there is an idea prices would be approaching a floor."

And European values may be liable to even slimmer losses, despite what might appear a "bearish context", in terms of a global market that is "well supplied".

French worries

The price comments reflect ideas that European wheat inventories will not rebuild in 2017-18, despite the prospect of a better harvest.

In fact, the US Department of Agriculture, whose data set global benchmarks, foresees a drop in EU carryout stocks of some 700,000 tonnes to 10.3m tonnes over the season, reflecting ideas that a rise of some 4.5m tonnes in output to 151.0m tonnes will be offset by factors including a recovery in exports.

That estimate for the EU harvest could prove overstated, given weather setbacks in France, the bloc's top producer, for which official European researchers cut their wheat yield forecast on Monday.

While the French crop had been seen at some 37m tonnes, "you are probably now looking at 35m tonnes", Mr Nolan said

"And the recovery in EU production was largely based on hopes for France," which suffered a weather hit harvest last year.

A large swathe of countries further east, from Poland down through Bulgaria, were likely to see a "reversal of yields, from excellent levels last year", with Mars flagging less benign conditions this year.

'Limited price downside'

"A drastic rise in [EU wheat] stocks in 2017-18, I do not think it is going to happen," INTL FC Stone risk management consultant Rory Deverell said.

"We see limited flat price downside" for wheat in Europe.

The impact of the dynamics was also being seen in a growing spread between wheat futures prices in Paris –which for September were priced at E166.50 a tonne on Tuesday, equivalent to $5.07 a bushel - and those in the US.

Chicago wheat for September was trading at $4.44 a bushel.

"Matif is getting a little bit higher than US prices. It is pricing in the idea that there is not going to be rebuild in EU stocks this year, with some of the weather we have had."

Palm oil support

He also flagged cause for some optimism in rapeseed prices too, besides the weather setbacks to crops of the oilseed too in some country's, with EU researchers on Tuesday saying that yield expectations in Germany, the bloc's top producer, were "mediocre".

Mr Deverell proposed that prices of palm oil – a big influence on values of rapeseed, which contains relatively high levels of vegetable oil compared with meal – may not this year see the weakness often seen around July and August, as production approaches a seasonal peak.

"Supply fundamentals mean prices may not continue that trajectory," he said, noting that palm oil output in Malaysia, the second-ranked producer, had disappointed the last couple of months.

"Malaysian palm oil stocks are not building" as had been expected.


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