- In a slight diversion from our usual format we thought it worth passing comment on the implications of the recent drop in crude oil prices. Ethanol production remains profitable in the US, according to our sources, but is under some pressure within the EU. Despite this, there is a suggestion that EU ethanol has recently been sold to S America at a more competitive level than US material, but further crude declines will impact EU production before it does the same to US. If that becomes the case there will be a knock on impact upon wheat prices, physical as well as futures, and that would be a negative impact (as if that needed fleshing out!).
- The current uplift in wheat prices caused largely as a consequence of fears over availability of Russian supplies is already putting pressure on the EU ethanol industry and prices in coming days and weeks will have to be monitored closely. Additionally, the higher prices have created a technically supportive platform from which further buying has emanated. As we have stated previously, by the time any restriction on Russian trade could be put in place it would only be the last 2 or 3 million mt of annual exports that would be impacted, and therefore of minimal disruptive impact to global trade. As such, the market premium which is now in place feels to us to be excessive right now.
- An overview of Russia today shows a further 11% drop in the Rouble today, 90% since the summer, and crude oil dropping below $56. Confidence in Russia is at its lowest ebb form many, many years and will surely take a long time to be restored. Investment will be limited and trust similarly difficult to establish, there are few, if any, takers on Russian wheat cash offers that are around right now.
- In corn, there is a split of view as to whether (or not) China has, or is about to, approve the GM event MIR162. Regardless of the actuality, China has too much corn in its domestic stockpiles, at prices well above global levels, to permit unfettered access to cheap (in relative terms) imports. They will surely find another GM event or phytosanitary reason to curtail volume imports whilst maintaining an aura of free access.
- Corn in Europe ended higher as a result of CBOT and MATIF wheat, Ukraine corn looks very competitive into the EU although establishing definite prices is somewhat difficult in practice. The Hryvnia hit new all-time lows and reports of defaults on cargoes to China continue to circulate. In an already difficult market the added complexity of plantings next year being maxed out due to the exchange rate looks set to become a reality.
- Soybean and product bulls are eagerly awaiting pronouncements from the Chinese delegation currently visiting the US. It is expected they will sign frame contracts, which from our understanding, have little commercial relevance as they contain no performance or penalty clauses; they are simply a memorandum of intent and should not be market moving. Given the imminent availability of a large (if not record) S American soybean harvest it feels as if we should see limited price upside from here on in.
- Markets in the run up to Christmas and year end don’t appear to offer much to make life any easier!