EU Grains Mixed, Does Forex Market Hold Key To 2016?

30/11/15 -- EU grains closed mixed, but mostly a touch higher on the day, with rapeseed regaining the "yellow jersey" position and closing with the largest advances on continued production concerns for 2016.

The day ended with Jan 16 London wheat up GBP0.15/tonne at GBP113.40/tonne. In Paris, Dec 15 wheat rose EUR0.50/tonne to EUR176.75/tonne, Jan 16 corn was unchanged at EUR165.50/tonne and Feb 16 rapeseed gained EUR3.50/tonne to EUR384.00/tonne.

For the month of November, London and Paris wheat and corn all down for the month, with only Paris rapeseed closing higher.

The pound fell below 1.50 against the US dollar at one point today, a close there would have been the first beneath that level in more than 7-months, before recovering a little late on.

Nevertheless, sterling remains "wobbly" against the US currency in particular, although the jungle drums are now starting to beat that pound strength may have run its course against even the euro as well, and that a downturn there is now on the cards for 2016.

Rabobank said that forex rates will have a bigger influence on agri-commodity prices in 2016 than ever before. If they are correct, and forecasts from some of the major bank/analysts hold true, then that might provide a bit of support for London wheat going forward.

ABN Amro said that sterling would be the weakest of all the major currencies in 2016. They say that the UK government will likely hold a referendum on a "Brexit" in Q3 of 2016, and a Bank of England interest rate rise is unlikely prior to that. The market had been factoring in a rise early in 2016.

Their favourite month for the first UK rate rise in years is now not until November next year. As such they see the GBP/USD exchange rate falling to 1.28 by mid-2016 and 1.25 in Q3 before recovering a little to 1.27 in Q4. That's way below where most other analysts line up. A recent Reuters survey put the GBP/USD rate at an average 1.5234 in mid-2016.

ABN Amro are also bearish on the GBP/EUR, seeing that at 1.41 in Q1, before falling to 1.35 in Q2 of next year and 1.3150 in Q3.

That could see London wheat benefit against not just the market in Chicago, but also compared with Paris wheat once we get towards the middle of next year.

As far as the EUR/USD exchange rate goes though, the US dollar is seen out-performing the single currency, hitting parity in Q1 of next year, before falling to 0.95 in Q2 and beyond, by ABN Amro. That largely concurs with Barclay's view of parity in Q1 and 0.98 in Q2 of 2016. This trend would see Paris wheat fare better than the Chicago market in the first half of 2016, and most probably beyond that.

Debate continues as to the size of UK wheat and rapeseed plantings for the 2016 harvest. Origin Enterprises estimate the UK wheat area at 1.9 million ha, up 2.5% on a year ago, and a bit higher than the HGCA's suggested 1.825 million. In contrast they see OSR plantings down 12% at 572k ha versus 565k from the HGCA. United Oilseeds were even more bearish at 536k ha, a 15% decline year-on-year, last week.

Winter crops in the UK are generally well established and in excellent condition though, Origin said.

In Ukraine, bits and bobs of winter plantings are still going on apparently. The Ag Ministry there say that 6.67 million ha of the originally intended area has now been sown (90% of the government forecast). That includes 5.64 million ha of wheat (91%) and 879k ha of barley (84%). Growers there have still only planted 649k ha (79%) of their originally intended winter OSR area.

Crop conditions and emergence in Ukraine are also well below year ago levels. Some are already talking of a wheat crop of only 17-19 MMT versus 27 MMT in 2015.

The fall out from the Turkish shooting down of the Russian fighter jet last week continues. Russia supplied 70% of Turkey's grain import needs last season, and 90% of them in Q1 of 2015/16. Sellers in Russia and buyers in Turkey are both said to be shying away from entering into new deals with each other for fear of restrictions being introduced that will only make the contracts more difficult to execute.

There are reports today of vessels carrying the Russian flag facing delays entering the Bosphorus Strait. Rusagrotrans said that Russia may have to re-direct around 1.6 MMT of grains intended for Turkey to other locations. The Turkish buyers of these commodities may also be forced to look elsewhere for suppliers.