Nogger's Blog

14/11/13 -- The weight of the ongoing record world corn harvest is capping upside potential for wheat - even with the record consumption levels forecast by the USDA on Friday (which some traders would say are optimistic) global corn supply in 2013/14 is seen outstripping demand by around 30 MMT. Meanwhile world corn ending stocks in 2013/14 are still seen rising to the highest levels since 2000/01. And that's before the EPA possibly lower the US ethanol mandate.

Goldman Sachs this week cut their forecast for US corn prices to $4/bushel in the 3-6 month timeframe, and said that prices could fall to $3.75/bushel inside the next 12 months. If they're correct then Chicago wheat is currently priced at around a 65% premium to corn 3-6 months hence, and an 80% premium in the 12-month period. They see corn plantings in the US falling 3% next year to 92.5 million acres - still a substantial area given that this relatively small percentage drop is from a level that was a 75 year high.

With US corn ending stocks seen finishing 2013/14 some 230% higher than they began it, the prospect of another large crop in the US next year is clearly what Goldman Sachs see as being responsible for US corn prices having a pretty bleak outlook across the next 12 months. With that in mind, South American growers though are already scaling back on their corn plantings for next year's harvest, albeit from very high/record levels.

Russia and Ukraine are currently heavily into record corn harvests of their own, and their hands look likely to be forced into planting even more corn in the spring of 2014 - at least partially filling the void left by Brazil and Argentina, and filling it much closer to home too.

The Russian Ag Minister says that spring grain plantings will increase by 2-3 million hectares in 2014, and that most of that will be corn. The Ukraine Ministry say that winter grain plantings are now over at a bit more than 7.7 million hectares, almost 500k ha below the original target of 8.2 million. Most of that will probably go into corn in the spring too.

So what's a (European) boy/farmer to do? Plant more wheat and hope for the best seems to be the plan of many. Lanworth, in one of the first analysts glances into 2014, estimated the EU wheat crop at 146 MMT yesterday, a 2% rise on this year's crop and the second highest ever, surpassed only by the 151 MMT produced in 2008 - and London wheat fell below GBP90/tonne that year! A scary thought, given that Brown & Co estimate the cost of wheat production in the UK at around GBP110-130/tonne this year.

Strategie Grains meanwhile have now forecast the EU soft wheat crop at 140 MMT next year. With durum output generally steady here at around 8 MMT, that implies an all wheat crop of maybe 148 MMT here next year - a little bit closer even to the 2008 all-time high.

We do know that a lot more winter wheat got planted this year than last here in the UK, and that crop conditions currently look hugely better than they did 12 months ago. The HGCA now forecast the UK wheat area for the 2014 harvest at 1.98 million hectares, a 22% rise on last year.

We also know that winter plantings and crop conditions are looking good on the continent and in the US, where 65% of the crop is rated good/excellent versus only 36% a year ago.

Of course the second half of 2008 saw us plunged into the abyss that was the sub-prime collapse, and nobody saw that coming (well, apart from that Muriel Nairobi bloke, or whatever he's called). I'm not predicting wheat prices here will fall back to the levels of 2008, but merely posing the question: is selling wheat at around the GBP150-160/tonne mark really that unattractive?

Regard GBP200/tonne as Kylie Minogue. Or GBP250/tonne as Kylie and Dannii together. It's nice to dream about, or even hope for, but is it really that realistic? Especially with a near record volume of other potential suitors out there on the dance-floor.

Who was it that said "hope isn't much of a strategy"? Selling a bit of new crop wheat now might look pretty smart come harvest 2014.