Grain Report - Northern hemisphere harvest commences amid a cloudy demand outlook…

The northern hemisphere winter crop harvest is underway amid escalating fears that a second wave of COVID-19 infections, particularly in the United States and Brazil, will lead to new lockdowns, lower global grain demand and exacerbate the enormous economic impact of the worldwide pandemic.

Wheat futures were punished with technical liquidation and abundant global inventories pressing all three US wheat bourses - Chicago, Kansas and Minneapolis - to new contract lows in last Friday’s session. Trade on the day was highlighted by the absence of substantive buying interest on both the domestic and export front.

Matif milling wheat futures also slipped to a three-month low on Friday. Still, they may find support this week after the European Commission further reduced its forecast for this season’s European Union soft wheat harvest by 4.3 million metric tonne (MMT) to 117.2MMT.

This estimate excludes the United Kingdom, and if their wheat crop is 10MMT, plus an EU durum harvest of 7.4MMT, the combined total is well below the USDA’s June estimate of 141MMT for the EU27 + UK. However, many in the trade see the Commission forecast as far too low with crop conditions improving in Germany, central Europe and the Baltic States throughout June.

Last Monday the USDA pegged the US winter wheat harvest at 29 per cent completed, and that number jumped sharply to 41 per cent in this week's report after 7 days of favourable harvesting weather. The winter wheat conditions were reported at 52 per cent good-to-excellent, slightly higher than a week earlier.

The surprise in last week’s numbers was the deterioration in the condition of the US spring wheat crop, falling six percentage points to 75 per cent good-to-excellent. Despite beneficial weather across the northern plains that number fell a further 6 points to 69 per cent in the latest crop progress update released on Monday (US time).

In Europe, the French wheat harvest is picking up in the south, but there are fears of fusarium developing in the northern areas following recent rains. Initial cuts in the south-west are showing good protein and test weights, but yields are well below the exceptional levels seen last year. France AgriMer estimated that 56 per cent of the country’s wheat crop was in good-to-excellent condition, unchanged from a week earlier.

The French barley harvest is fractionally further advanced with early yields and test weights generally good, and certainly better than the very dry spring conditions indicated. France AgriMer rated the winter and spring barley crop conditions as 51 and 54 per cent good-to-excellent respectively.

Harvest in the Black Sea region has finally commenced after low temperatures, and some wet weather in late May and early June delayed ripening of the crop. The market is eagerly awaiting early winter crop yield trends as this will set the tone for global export values over the next few months.

The Stavropol region in the south of Russia is a key export producing region. The winter crop harvest is reported to be around 9 per cent complete, predominantly barley at this early stage. Anecdotal reports put early yields down around 40 per cent compared to last year but cannot be considered representative of all crops in the region at this early stage of harvest.

Further east in Krasnodar, Russia's second-biggest wheat-producing region, early barley yields are down year-on-year but are broadly in line with local trade expectations. This bodes well for wheat production as it was sown later and is not expected to have been as severely impacted by frosts and the early spring dryness.

Spring wheat crops in Russia and Kazakhstan still have at least six weeks to go before they are out of jail. It has been relatively dry throughout June but the chances of rainfall over the next few weeks has improved. However, despite record temperatures in parts of northern Siberia last week, the spring wheat regions remain abnormally cool.

The Ukraine harvest is lagging last year’s early pace but has commenced ahead of the five-year average. Around 125,000 metric tonne was in the bin as of late last week. Again, this is predominantly barley, and early yields are poor, averaging about 3 metric tonne per hectare, but higher numbers are anticipated as the harvest accelerates.

The size of the Russian crop is the pressing question. The Russian Agriculture Ministry has it pegged at 75MT; the June USDA number was 77MMT; IKAR consultancy has increased their forecast to 79.5MMT. And SovEcon, who have been above 80MMT for the entire campaign, raised their estimate mid-month to 82.7MMT.

The lack of demand and commercial activity in the export market remains notable with consuming nations waiting on the European and Black Sea harvests to ramp up to full pace, and the weight of new crop supply to pressure prices lower, before extending cover.

However, there already appears to be tightness in Black Sea wheat due to the lack of farmer selling. According to local analysts, this could easily extend well beyond July as Russian farmers are on the cusp of a huge sunflower seed crop, which is worth a lot more than wheat and takes up double the storage capacity.

After getting their butts handed to them last year, there is a decided reluctance on behalf of exporters to go hard at selling new crop ahead of harvest, especially with historically low carry-out stocks. Based on last years’ experience, going short harvest positions in front of the Russian farmer is quite a high risk, low reward strategy.

Except for Australia and Russia, wheat production estimates appear to be on the decline - ironically at the same time as most futures markets are falling to multi-month lows. Moreover, carry-out stocks amongst the major exporters are estimated to hit multi-year lows. Nevertheless, it is the demand side of the equation that continues to cloud the picture.

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