Nogger's Blog

18/07/11 -- It looks like a shaky week lies ahead for the euro with the pound rising to 1.1460 against the single currency in early trade. It seems that the results of Friday's stress tests on EU banks showed eight out of ninety failing, which was apparently less than the market had expected. However it appears that the devil is in the detail.

From what I read over the weekend although all the relatively big banks passed, it seems that many only just managed to scrape over the imaginary hurdle in front of them. Further analysis this week may show that many of the larger banks would have failed faced with slightly more stringent criteria.

As well as the European debt crisis we also have the US debt ceiling issue hanging over the market. I find it hard to envisage grains pushing significantly higher this week with these problems in the limelight.

Russia's First Deputy Prime Minister Viktor Zubkov said on Friday that the country will produce 90 MMT of grains this year, an increase of 48% on the 60.9 MMT officially produced last year.

Gossip on the sidelines of the forum I attended in Kiev last week suggests that last season's grain crop, whilst still a disaster, wasn't as big a disaster as the official figures suggest and maybe was more likely to have been in the 68-70 MMT region.

Zubkov seemingly didn't give a specific forecast on the wheat harvest but did peg barley production at 16-18 MMT, a rebound of 92-116% on last season (USDA currently 15.5 MMT).

At the same conference Agritel estimated Russian wheat exports at 15 MMT this season, a 275% increase on 2010/11 and 3 MMT more than the USDA's latest number. Exports out of Ukraine will reach 9 MMT this season they said, a 143% increase on 2010/11 and 1.5 MMT more than the USDA currently forecast.

APK Inform forecast a Ukraine wheat crop of 19.3 MMT, 1.3 MMT higher than the USDA, with barley production there at 8 MMT (USDA: 7.5 MMT) and corn output at 15.0 MMT (USDA: 15.5 MMT).

Despite having been told to pack a raincoat it was very warm and dry, although heavy rains in May and June are likely to have cut the percentage of the wheat crop suitable for milling from the 45% official estimate to more like only 20-30% it was felt. These same rains are likely to have led to significant losses in rapeseed production was also the general vibe.

So there we have it. Russia seems likely to have plenty of cheap wheat to sell, and isn't wasting any time on mopping up orders at levels way below EU and US offers. Carryover stocks from last season were likely to have been significantly higher than official figures show.

Ukraine has plenty of cheap feed wheat to sell and is looking for buyers. Out of interest traders there now seem more or less resigned to the fact that the VAT the government are supposed to repay them on exports is simply never going to turn up. Unfortunately for growers there that is likely to be reflected in the prices on offer.

Production and exports out of both countries are probably higher than the current USDA numbers.

Kazakhstan was also represented, and they too seemed confident of better crops this year without giving any specific numbers.

Armed with the news that Egypt has just bought another three cargoes of Russian wheat at USD2 million per shipment cheaper than French it's clear that the balance of power is switching back to the Black Sea for 2011/12.

I have to say that there was some bemusement as to why Russian wheat is USD30-40/tonne cheaper than French wheat at the moment, and some discussion as to whether that gap could and would narrow. And of course if that would entail the price of Russian wheat moving up, French wheat moving down or both.

With the EU currently importing more wheat on a weekly basis than it is exporting, upside for the time being must surely be limited?