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Changes in exchange rates and FED’s decisions will be the agenda of 2015

12 January 20157 min reading

Despite the growth in production, the rising tension between Russia and Ukraine marked the wheat transactions in 2014. Particularly with the news that Russia will restrict the exports, we have seen that the wheat price increased. Expectations for 2015 have also started to shape.  While forecasts in production are not expected to change dramatically, the data related to Russia will continue to be effective. Besides, one of the top issues for 2015 is changes in exchanges and the decisions of FED.

  Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com The year 2014 passed reelingly in terms of wheat. Production forecasts marked the terminal markets in this year that harsh movements happened. Sales seemed to increase as soon as the first wheat production forecasts of 2014-15 season were announced. After September, a reverse situation took place. Despite the growth in production, the rising tension between Russia and Ukraine marked the wheat transactions. The rising tension between these two countries and rising restrictions on Russia caused wheat prices to rise. The news that Russia will restrict the export also caused wheat price to rise over 600 cent/bushel again. Thus we closed the last month of 2014 with Russia. Estimates report of US Department Of Agriculture which was announced in May 2014 had forecasted 697,04 million tons of wheat production. This amount which exceeds over the expectations is lower than the production amount in 2013/14. However the sales were so high that loss in value over the rate of 35% happened in a short time. Meanwhile, every new production forecast exceeded over the previous one. Together with newly announced ones, the production forecasts of December rose to 722,18 million tons. In other words, 25,14 million tons of increase occurred after the first production forecast. This is higher than the annual wheat production amount of Turkey. In this aspect, an unexpected change in production forecasts can be seen. However, it may not be very right to attribute the realized sales only to the increase in production forecasts. We have seen harsh sales in commodities in 2014. Commodities in agriculture had share of this. Decrease in wheat prices was quite distinct. We have observed that the liquidity in the market decreased and the positions were reviewed especially following that The Central Bank of US (FED) started to lower the quantitative easing. Investors started to reorganize the positions according to the new economic order. As a result of this, we witnessed the increase in commodities sales. The impact of this was perceived more in gold and oil transactions. It was also reflected on agricultural commodities as rapid and winded decrease. DEMAND FOR U.S. WHEAT DECREASED US Dollar that gained value compared to other currencies affected commodities negatively. The value of commodities prices on dollar basis started to decrease. USA is the biggest exporter in the world. However, while USA provides 16% of world wheat exports, it realizes 7,6% of global wheat production. All the countries except USA and Canada provide 88% of world wheat production. Thus increase in the value of US Dollar causes wheat prices to decrease globally. As a matter of course, because the competitive price of wheat decreases, we see that demand for US wheat decreases too. Weekly wheat export of US had already dropped to the lowest level of the season in November. It is stated in the latest food report of World Health Organization that wheat stocks will reach to the highest level since 2003. Both increase in world wheat production forecasts and FED’s decision of quantitative easing was decisive on wheat prices. THE PRICE OF RUSSIAN WHEAT LOSES VALUE Russia provides 8,2% of world wheat production by itself. It produced 52,09 million tons of wheat in 2013/14 season. In 2014/15 season, the production amount is expected to reach to 59 million tons. In another word; there is 6,91 million tons of production growth compared to previous year. Wheat export of Russia provides 13,9% of world wheat export. In short, Russia has an important place in world wheat exports. Enforcements on Russia following the tension with Ukraine and afterwards losing value in its currency had an impact on wheat market. Wheat price of Russia decreased on dollar basis. However, increase in demands is not expected after exports are restricted. In this situation, we can say that supply and demand in the market became unbalanced. Moreover, rapid rise at the beginning of December confirms this. WHEAT PRICES IN TURKEY IS STABLE We can say that Turkey is one of the rare countries where the price of wheat remains stable. The drought in Turkey prevented the decrease in wheat prices. While wheat prices drop in the whole world, wheat prices in Turkey remained horizontal. Turkish Grain Board (TMO)’s attitude which was parallel to the market in terms of purchase and stock sales was also effective on this. While extreme rise was not recorded in wheat prices, decrease was also not recorded contrary to the world market. Due to these dynamics of wheat market in Turkey, TMO has not announced the intervention price yet. As I stated earlier, TMO kept the market under control with stock sales and purchase tenders. There are regional production differences in the wheat prices in Turkey. While the production in Thrace is high, the impact of drought is perceived in Inner Anatolia and Eastern Anatolia. However it does not change the general course of prices. The loss in production caused by drought is expected to be over 20%. INCREASE IN WHEAT EXPORTS OF EUROPE, CANADA AND KAZAKHSTAN According to the forecast report published by United States Department of Agriculture (USDA), the amount of wheat production has recorded an increase of 2,32 million tons in comparison to the previous month. Thus, the amount of production rose to 722,18 million tons and the increase reached to 64,24 million tons in comparison to 2012. In another word; there is a serious increase in production when compared to 2012. As I stated earlier, according to the forecast report of 2014/15 season which was announced first, there is an increase of 25,14 million tons. It is seen that Canada and Kazakhstan were particularly effective on increase in forecasts. Together with the increase in production, an increase in the end of period stocks is expected. End of period stocks reached to 194,9 million tons by increasing 2 million tons. The increase in Canada, USA, Middle East and Russia cause end of period stocks to increase too. At the same time, it is seen that decrease in wheat consumption is expected. There is a decrease of 1,5 million tons in European based wheat consumption. Despite this, there is an unexpected increase in exports. An increase in exports of wheat from Europe, Canada and Kazakhstan is expected. In terms of consumption, china keeps the leading position alone as usual. China’s wheat consumption is estimated to reach 124 million tons. In another word; China will consume 17,2% of world wheat production by itself. China also keeps 32,3% of world wheat stocks. So deceleration of Chinese economy may negatively affect the global wheat demand. FORECASTS FOR PRODUCTION DO NOT CHANGE IN THE NEW SEASON The march dated price of wheat in the Chicago Mercantile Exchange has maintained its upward trend which started in October. Particularly with the news that Russia will restrict the exports, we have seen that the wheat price exceeded over 600 cent/bushel. So we happen to close the year 2014 with these upward trends. However, despite the aggressive and floating course during the year, we are almost where we were at the beginning of 2014. Expectations for 2015 have also started to shape. While forecasts in production are not expected to change dramatically, the data related to Russia will continue to be effective. Besides, one of the top subjects of 2015 will be the change in exchanges and FED’s decisions. For the march dated wheat price, the price level of 600 and 570 cent/bushel becomes important. The upward trend can be expected to strengthen as long as the prices remain above the level of 600 cent/bushel. From time to time, we can see rapid upward movements. The decrease in forecast reports help the upward trend strengthen. In the event that the level of 570 cent/bushel moves downwards, trend in sale can be expected to increase. In this situation, we can see that new basal levels are searched.
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