EU Grains Stumble

14/01/16 -- EU grains closed lower across the board. We're only half way through the first month of the new year, but there are already signs of one or two throwing their hands in. Tuesday's mini Chicago wheat rally looks like it provided nothing more than a selling opportunity - and one that passed Europe almost entirely by.

The fact that the US produced just 7.6% of the global wheat crop in 2015 perhaps highlights why the trade should be cautious about using relatively changes to supply and demand factors there as a major influence on the world market. For corn and soybeans the percentages are much higher, and therefore S&D alterations to those two crops are all the more critical.

World 2015/16 wheat ending stocks are now projected at new record levels, European inventories are seen at the highest in 10 years - including French reserves potentially at "more than double last season’s level and the highest volume available to the market in over 20 years," according to the HGCA.

Reduced US winter wheat plantings and therefore supply in 2016 shouldn't therefore appear set to bring the market to it's knees, there are plenty of other willing sellers around the globe looking to take up the slack.

Nidera today lowered their forecast for Australia's 2015/16 wheat exports to 16-17 MMT, citing tough foreign competition and cheap global freight rates. "A drop below the 16.6 MMT recorded last season would see shipments hit a six-year low," noted Agrimoney.

At the close of play in Europe, Jan 16 London wheat was down GBP1.50/tonne at GBP108.25/tonne, Mar 16 Paris wheat was EUR2.00/tonne lower at EUR166.25/tonne, Mar 16 Paris corn was down EUR2.00/tonne at EUR155.75/tonne, whilst Feb 16 Paris rapeseed fell EUR2.50/tonne to EUR361.75/tonne.

It would seem to be getting increasingly important then that we keep a daily eye on old crop/new crop premiums, as these are one of the main factors encouraging growers (UK ones in particular) to feel relatively relaxed about carrying unsold wheat from the 2015 harvest ever closer to that of 2016.

The May 16 - Nov 16 London wheat spread closed at GBP8.75/tonne tonight, down from EUR9.40/tonne last night, but still up from GBP7.65/tonne at on New Year's Eve and still rather hefty.

Is that GBP0.65/tonne lost overnight or GBP1.10/tonne saved in the past fortnight?

Regardless, it's now a differential of 7.8% versus 6.5% at the end of 2015. In Paris tonight, we have the May 16 - Dec 16 wheat spread at EUR8.50/tonne, or 4.9%, so London wheat is still offering a return significantly more attractive that the French market.

Why should that continue to be the case, and what would happen if the premium being paid for Nov 16 London wheat looks like it has now started decrease? Would that encourage more old crop selling (if buyers could be found), or switch producers' attention to new crop before further differential erosion is seen?

In other news, Russian and Ukraine remain busy wheat exporters, aided by the weakness of their domestic currencies. Russia says it exported 688 TMT of grains so far this month (to Jan 12), and that's during a holiday and weather affected period, including 478 TMT worth of wheat. Total 2015/16 grain exports to date are said to be 23.6 MMT, including 18.48 MMT of wheat.

Brent and NYMEX crude oil flirt with falling below $30/barrel as the West look to ease sanctions on Iran, potentially adding further, and unwanted, supply to that market.