A major supply-side shock is required to break the cycle of building global stocks and allow for a significant uplift in global prices, Rabobank said, after the latest USDA world agriculture supply report report did little to lift global grains and oilseeds markets off their multi-year lows.
Global stocks for corn, soybeans and wheat are anticipated to be a combined 528 million tonnes for the 2015/16 season, making this the third consecutive year of increasing stocks. Global wheat stocks are anticipated to reach a record-breaking 237.6 million tonnes this year, or the equivalent of approximately ten years of total Australian wheat production. Market participants around the world are monitoring Northern Hemisphere Spring crop conditions for any sign of adverse weather that could prevent the forecast continuation of global stock-building for grains & oilseeds into the 2016/17 season.
The building of record-large global stocks of grains & oilseeds has caused global wheat prices to decline by 8 percent over the past 12 months. Domestically, Australian wheat prices are down 8 percent since mid-January, as exports are struggling to gain traction in a very competitive market.
Large 2014/15 European and Black Sea wheat crops have been used to service a significant portion of the global demand, with larger quantities moving to destination markets outside of the traditionally serviced Middle Eastern and North African markets, Rabobank said, adding that Argentine wheat exports—which have benefited from the liberalisation of the export market, as well as the strong currency depreciation—have also remained highly competitive.
Compounding the competitive pressure felt as a result of large stocks is the large decline in global crude oil values, which has enabled sea freight rates to drop to multi-year lows. Crude oil prices are currently around USD 41/barrel, compared to USD 48/barrel 12 months ago. Compared with freight rates from 2010, the low cost of oil is working to cut Australia’s freight advantage into geographically close export markets such as Indonesia by more than 50 percent versus Russian and Ukrainian wheat, Rabobank said in a report.
Despite large global grain & oilseed stocks and low global freight prices, optimism still remains. The current weight of bearish news has somewhat skewed commodity price risks to the upside, especially with funds holding close to record-large net short positions, meaning that the first signs of a widespread supply hiccup would serve to drive significant upside potential to prices. The Northern Hemisphere Spring is crucial to the development of wheat crops across Europe and North America and thus holds the next possible window for any upside potential for grain prices globally, it said.