Nogger's Blog

23/07/14 -- I'm going to shock you now. I'm starting to turn a little bit friendly to the wheat market, at least the milling wheat market anyway. I will try and quantify my reasons why, although many of the factors at play still very much fall into the "unpredictable" category, but I'll give it a go.

First and foremost we have the ongoing situation in Ukraine and rising tensions between Russia and the West. Exactly how this situation will be resolved is very far from being clear, but Big Bad Vlad is not a man known for his kowtowing to the West is he?

Further US and EU sanctions against Russia look likely, although we don't know in what form these will take. Only an idiot would expect no retaliation from Mr Putin, and he's not exactly short of some nice cards if it turns into a game of poker. For a start he could freeze Western assets in Russia.

Certainly Germany would want to adopt a softly, softly approach, and avoid an all out trade war. German exports to Russia totalled EUR38 billion in 2013 - the highest of any EU nation.

In addition, there's gas. Europe relies on Russia for 24% of its natural gas supplies, and in many countries closer to them than we are in the UK this percentage is very high - pretty much 100% in the case of Estonia, Latvia, Finland and Lithuania for example. In Belarus, the Czech Republic, Slovakia and Bulgaria it's said to be 80-100% reliance, and in Ukraine, Austria and Greece it's 60-80%.

An escalating trade war with Russia would be bullish for world wheat prices, as global demand switches to the West.

Meanwhile who knows what will ultimately happen in Eastern Ukraine? I'm hearing reports of farmers in the region considering it currently to be "too dangerous" to harvest their wheat.

I went to Ukraine a few years ago and remember then of being told stories of men with guns and lorries simply turning up at a farm one day and essentially saying that they'd come to take "their wheat" away. Unless you know bigger, more well connected men with bigger guns then that's the sort of thing that can happen over there I was told. And that was then, not now.

I don't imagine that it's too easy to get contractors in to harvest your crops if you're in the east of the country either.

All this, and the fact that your wheat/corn is/will only be worth less than the cost of production if and when it's harvested will also have your Ukraine farmer pondering "what the fcuk am I going to plant for 2015, if anything?" I'd have thought. "And where's the money going to come from?" Many that do plant will likely be using inferior home-grown seed too.

Right now you'd have to say that the prospects for Ukraine getting a third bumper grain crop in a row in 2015 look relatively low. Meanwhile, if I was a betting man (and I am), then I'd be tempted to suggest that Russia might be due a weather-related production problem of it's own next year. Let's make this clear, I'm not forecasting a Russian drought in 2015, I'm just saying that in a country that's had two market-moving droughts in the last 5 years, getting 3 bumper crops in a row there is also statistically unlikely.

Now let's throw into the equation that fund money is short in wheat. Let's also consider that reports coming out of France suggest they might have a rather large crock of shit on their hands this year as far as milling quality goes. And there are rumours that there could be problems in Germany too when their harvest finally clicks into gear.

Now if the French wheat crop does turn out to be a pile of pooh, then we need to consider that 38-39 MMT of pooh is an awful lot of pooh. I haven't seen that much pooh since I last watched the Lenny Henry Show. Add in some extra German pooh, comparable with say the Vicar Of Dibley. And we potentially to have a large European excrement surplus in 2014/15, which isn't exactly over friendly to feed wheat prices though note.

The jury remains out on Romania's 2014 wheat crop as far quality is concerned, even if they have been picking up sales to Egypt's GASC of late (they are back in the market today incidentally, tendering for Sep 1-10 shipment). Incidentally, even if you feel comfortable buying Ukraine wheat for 2014/15, a greater proportion of their crop is only thought likely to be up to feed grade than normal this year.

French corn prices meanwhile are on their arse, currently down EUR2.50-3.50/tonne again this morning to the lowest levels in over 4 years. It seems like the conditions that have led to the French wheat crop downgrades are seen as positively beneficial for corn, at least for the time being. Another negative for those with feed wheat to sell, I'm afraid. I'd certainly fancy putting some milling wheat cover on at these levels though.