EU Grains Rally Late On USDA Report, Justified Or Not?

12/01/16 -- EU grains traded lower for most of the day heading into the release of various production and stocks data from the USDA due at 17.00 London time. That was a bit late in the EU session to make a dramatic difference to closing levels, but did nevertheless drag things into the green, with the official closes of the day being at, or near, the day's highs.

At the finish, Jan 16 London wheat was up GBP0.80/tonne at GBP111.00/tonne, Mar 16 Paris wheat was EUR1.50/tonne higher at EUR170.75/tonne, Mar 16 corn rose EUR1.00/tonne to EUR159.50/tonne and Feb 16 rapeseed was EUR1.25/tonne firmer to EUR365.25/tonne.

The pound worked lower following news that UK industrial output fell 0.7% in November - the largest monthly decline since Jan 2013. That in theory should aid exports and hinder imports going forward.

Before we have a look at what the USDA had to say late in the say though, the news that the market had to go on prior to that included a background of high EU and UK corn imports so far this season.

EU data shows that Europe has imported 6.93 MMT of corn so far in 2015/16, against the 9.35 MMT shipped in during the whole of last season. Corn imports for the past 5-years average 8.37 MMT, so we certainly look to be on target to in for an above average season this time round.

Meanwhile at home "UK corn imports in November were at their highest monthly level since March 2014 at 259 TMT, according to the latest HMRC data, despite ample supplies of domestic feed wheat this year," said the HGCA.

UK wheat exports in November were substantially less than the volume of corn imported, at 195 TMT, although imports dropped to little more than 82 TMT (with Finland interestingly the largest supplier).

Season to date UK wheat exports are 655 TMT, around 5 TMT less than those of a year ago at this time, with Spain that largest home taking 242 TMT of that total.

Late in the afternoon, the news from Washington was that the USDA have estimated US winter wheat plantings for their 2016 harvest down 7% this year

"At 14.8 million ha, the US winter wheat area is provisionally the smallest since that for harvest 2010 with sharp falls in both the Hard Red Winter (-9%) and Soft Red Winter (-5%) wheat areas," noted the HGCA.

"The year-on-year decline in the winter wheat area is also more than was expected before the report’s release; the largest fall expected in a pre-report poll by Reuters was -3%," they added.

Is the cure for low prices, low prices? Maybe in the States, where the average grower has a few more options open to him than his EU counterpart - where wheat sowings for 2016 are already seen little changed (and with French winter wheat plantings beating even last year's highest since 1936 total to supposedly be the largest in 80 years).

As far as the 2015/16 marketing year goes, the USDA dropped expectations for EU wheat exports by 1 MMT to 32.5 MMT citing the "slower than expected pace and sluggish export licenses" seen so far. Production here in 2015 was tweaked even higher than last time, and is now seen at a record 157.66 MMT. The combined effect of those takes EU 2015/16 ending stocks up to a hefty 18.95 MMT - we haven't seen carryout that high since 2005/06.

Ukraine's wheat exports were boosted 500,000 MT to 15.5 MMT "based upon a significantly faster pace of feed-quality wheat shipments, particularly to Southeast Asia."

Argentina was seen picking up 1 MMT extra worth of wheat export business this season "on the announced elimination of export taxes and quotas by the incoming government." Canada's exports were upped 500,000 MT to 21.0 MMT "on the continued strong pace of trade to date and a larger than anticipated crop."

The morning headlines might read a bit bullish for US wheat, but the fine print doesn't seem to do so as far as the rest of the world is concerned.

Note too that fund money was carrying a sizeable short position in wheat, and also in fact corn and soybeans, into today's reports so a knee-jerk reaction may not have been entirely unexpected.