Oct 30 / Alef Dias

Grains, Oilseeds and Livestock Weekly Report - 2023 10 30

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  • The southern hemisphere harvests are approaching their conclusion, and this is arousing growing interest in the market, especially due to the unfavorable weather conditions in Argentina and Australia. Even after the recent adjustments made by the USDA to its estimates for both countries, there is still room for possible further reductions. 
  • However, in the northern hemisphere, initial information for the 24/25 harvest points to another year of solid winter production in the region's main producing countries. This is largely due to the increase in the planted area in the Black Sea countries and the expectation of better yields and less area abandonment in the US.
  • As a result, wheat markets are likely to have a tighter first half of 2024 and more relief in the second half of the year.

Wheat: Different signs in the northern and southern hemispheres

Introduction

The southern hemisphere harvests are heading towards their final stages, and with that they continue to attract more and more attention from the market participants - mainly due to the fact that the weather continues to be adverse in both Argentina and Australia.
However, in the northern hemisphere, the first data for the 24/25 harvest is pointing to another year of good winter production in the main producing countries. This report will provide an update on the harvests in both regions and how these factors should affect prices and the global supply and demand balance.
As harvest of spring crops in the Northern Hemisphere advances, our focus turns even more to Southern Hemisphere, as crops in Argentina and Australia enter their critical development months.
Even with the severe decline in Australia’s output due to the El Niño and the “not-so-great” recovery of Argentina’s crop, these countries still rank among the top exporters and combined they will be responsible for around 15% of global exports according to USDA’s current estimates.
Consequently, impacts on their crops remain relevant to the world’s wheat supply and demand balance, so this report aims to discuss the recent developments in Argentina’s and Australia’s crop

Argentina: rains arrived too late

Argentina - the second largest producer and exporter in the southern hemisphere - has been facing very similar weather conditions to last year's crop, which was a historic crop failure for the country. The main producing regions have received rains in recent days, and forecasts point to a continuation of these rains in November).
However, around 7% of Argentina's wheat is already harvested, so these rains probably came too late to change the outlook for the crop. The Rosario Stock Exchange is already working with a production estimate of 14.3M mt - around 2M mt less than the USDA's current estimate.
Fig. 1: Wheat Good and Excellent conditions – Argentina Wheat (%)

Source: Bolsa de Cereales

Australia: more room for recovery, but forecasts are gloomy

As expected due to El Niño, the Australian crop continues to face extremely hot and dry weather compared to the historical average, which should have a significant impact on wheat yields in the country. Compared to Argentina, Australia has a slightly later harvest, as Australian producers usually start harvesting their wheat in December. Consequently, the country's crop still has more room to recover.
However, the weather forecast for November does not point in this direction, as practically the entire country is not expected to receive much rainfall next month. The USDA's current estimate - of 24.5M mt - is already a very negative scenario, but the yields seen in other recent failures show that there is still room for reductions in estimates.
Fig 2: Precipitation Anomaly – Australia - Nov-23 (mm/day from normal)

Source: hEDGEpoint, NOAA

Northern hemisphere: soil moisture is a concern, but area and climate can offset it

In the northern hemisphere, the 24/25 crop is being planted and some relevant data is already available. Looking at the main Black Sea producers and exporters - Russia and Ukraine - the planted area data so far points to an increase in area compared to last season.
This move is very surprising given the lower level of wheat prices, the challenges posed by the war (mainly on the Ukrainian side), and the high stocks in Russia due to the country's last two excellent crops. On the other hand, soil moisture is at its lowest level in recent years in the main producing regions of both countries, which could lead to lower yields.
Looking at the November rainfall forecasts, a change in this situation can be expected in Ukraine, while the main producing regions in Russia should continue to face drier weather. With regard to temperature forecasts for the dormant period, the risk of winter kill seems low at the moment.
Fig. 3: Winter Wheat Planting Progress - Russia (M ha)

Source: : Russian Agriculture Ministry

In the US, however, the situation is practically the opposite. After a record planted area in the last season, American producers are likely to plant less winter wheat, given that the drop in prices this year has been much greater than the drop in costs. However, the weather so far has been more favorable. Soil moisture is above 2022 levels and drought conditions are not as severe as last year. Forecasts for the month of November bring a mixed picture for the main producing states - more rainfall in Texas and Oklahoma, while the weather is expected to remain dry in Kansas.
As a result, a good crop is expected in the US so far, which could even surpass that of 23/24 if area abandonment returns to the average and yields remain around the trend.
Fig 4: Plains Daily Root Zone Soil Moisture (% in the 1st meter)

Source: Refinitiv

Fig 5: Production and Harvested Acres Winter Wheat - US (Bi bu, M ac)

Source: USDA, Refinitiv, hEDGEpoint

Conclusion

The southern hemisphere harvests are coming to a close, and this has drawn increasing attention from the market, mainly due to the unfavorable weather conditions in Argentina and Australia. Despite the latest adjustments made by the USDA to the estimates for both countries, there is still room for further cuts.
Meanwhile, in the northern hemisphere, initial data for the 24/25 harvest indicates another year of good winter production in the region's main producing countries, largely due to the larger area planted in the Black Sea countries and the expectation of better yields and less area abandoned in the US. As a result, the wheat markets are likely to have a tighter first half of 2024 and more relief in the second half of the year.

Weekly Report — Grains and Oilseeds

Written by Alef Dias
[email protected]
Reviewed by Pedro Schichi
[email protected]
www.hedgepointglobal.com

Disclaimer

This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878-8408 (for clients in Brazil only).

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