The Good News: The Bloke In The Next Bed Wants To Buy Your Slippers!

24/08/15 -- EU grains trade lower across the board. Paris rapeseed fares the worst, down over EUR10/tonne on front month Nov 15 at one point, as soybean prices collapse to below $9/bushel  on a front month for the first time since the aftermath of the 2008 financial crisis.

The good news, if you can call it that, in so much as "the bloke in the next bed wants to buy your slippers" sort of a way, is that London wheat isn't taking as much of a pasting as the French grains are. That's because the euro is suddenly the market's favoured currency.

As mentioned on Friday, the market thinking is that the crisis in China (who's stock market fell more than 8.5% this morning) will be putting back ideas of a US and UK interest rate any time soon. The notion that US rates might rise as soon as next month, and that those in the UK could follow suit fairly shortly afterwards, is what has been supporting the dollar and sterling. That all appears to be out of the window now.

So the pound is down below 1.37 against the euro, which is also up to almost 1.15 versus the US dollar. Not that sterling is under pressure across the board, it's up to new highs against the South African rand, and the Australian, New Zealand and Canadian dollars - regarded as more commodity dependent currencies than the pound.

At noon, Nov 15 London wheat was down GBP0.75/tonne to GBP114.00/tonne, Sep 15 Paris wheat was EUR4.25/tonne easier at EUR162.50/tonne, Nov 15 Paris corn was down EUR3.00/tonne to EUR171.25/tonne, whilst Nov 15 Paris rapeseed had slumped EUR9.75/tonne lower to EUR347.75/tonne - we haven't seen a front month that low since May 1.

The Russian rouble, who's value is closely linked to crude oil prices, is also under pressure today, falling to new lows against both the euro and US dollar. NYMEX crude trades below $39/barrel on the spot - we haven't seen things down that low since the post sub-prime capitulation days of late 2008/early 2009.

The current situation in fact feels very reminiscent of those dark days, market fundamentals are out of the window as everybody stampedes for the exits. I guess we can only console ourselves with the belief that things can only get better. Can't they?

Talking of fundamentals, let's get back to those. What are they? They are that Russia's harvest is about halfway done, and they have a larger crop than most (myself included) thought was possible/likely earlier in the year. The Russian Ag Ministry now estimate the total grain crop there at 102.9 MMT, down only a fraction on 105.3 MMT a year ago. This year's number will include 59.8 MMT of wheat, 17.4 MMT of barley and 13 MMT of corn, say the Ministry.

Russia's exports have however been slow to get going, despite having some high profile success in recent GASC tenders. Traders there seem reluctant to commit too much on wheat sales, due to the existence of the current floating export duty on wheat. That is tied to the value of the rouble, and that as mentioned earlier is on the floor.

If we glance back at the last Egyptian tender, they paid $184.39/tonne then for Russian wheat on an FOB basis. At today's exchange rate that's around RUB13,000 - well above the level at which the duty kicks in, and in fact RUB1,000 more than the equivalent when the deal was done little more than a week ago.

The higher the price paid in rouble terms, the larger the export duty due. According to my calculations, when the last deal was done the duty payable was around $7.50/tonne, today it would be around $14/tonne - almost double.

It's not hard to see therefore why rapid changes in liability like this would make Russian exporters reluctant to commit to sales right now. The government are said to be looking at ways of making the duty fairer, but they haven't done so yet. Until they do that could keep a fair bit of Russian wheat off the market.

That however is about the only good news I can offer you. The other fundamentals are: Ukraine's crop is, like Russia's, also larger than we thought. And unlike Russia, they aren't shy in offering it up for sale. Ukraine seaports exported 628.8 TMT of grain last week, according to APK Inform. Of that 289.8 TMT was wheat, 150.9 TMT was corn and 188.1 TMT was barley.

The wheat crop in Europe also looks like being better than thought. Drought and dryness didn't harm the French crop, that's come in at a record 40.4 MMT, say their Ag Ministry. UK yields appear to be well above average too, with a crop of 15.5-16.0 MMT on the cards, according to my thoughts. And of course there's still a large carryover from last year to contend with, as well as lower exports than Defra forecast for the 2014/15 marketing year.

The EU Commission's MARS unit have today raised their forecast for EU-28 soft wheat yields to 5.81 MT/ha, which is 2.5% above the 5-year average. They've also increased winter barley yields to an average 5.61 MT/ha, which is 4.7% above the 5-year average. Spring barley yields were left unchanged from a month ago at 3.87 MT/ha, down 1% on the recent average. OSR yields were raised to 3.25 MT/ha, which is 3.8% above the 5-year average. Only corn yields are lowered, down from the 6.71 MT/ha forecast a month ago to 6.40 MT/ha, and 8.8% down on the recent average.