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Demand increase from Brazil and China and its effect on prices

07 November 20137 min reading
Zafer Ergezen December futures wheat price followed an upward trend especially due to the increasing demand from Brazil and China in September. Especially the appreciation trend that had started at the end of September continued in October. In this period we experienced the upper level of 640-710 cent/bushel level that I mentioned on my previous article. It was clearly seen that sales increased and more balanced sessions were experienced at 710 cent/bushel level. It is seen that wheat price followed a strong course despite the high production expectations. According to International Grain Council (IGC) data; while world wheat production estimations increase, wheat stocks also increase. From this point; it is understood that there is an inverse correlation between the wheat estimations and price movements for October. It is seen that the primary reason for that situation is the increasing demand from Brazil and China.   Food and Agriculture Organization of the United Nations (FAO) decreased its wheat production estimation to 704,06 million tons by being reduced 5,2 million tons in its status report prepared monthly. This figure points the highest yield of the last 5 years. Shortly; even if there is decrease expectation, record high production estimations still continue. Likewise the wheat socks decrease in the world wide. According to the estimations; end period stocks will decrease to 558,8 million tons by being reduced 10,4 million tons. Although the high rate decrease of the stocks is explained by increasing demand, record high stock expectations still continue. Based on these data; there is not any data that may cause marginal change in wheat prices. However; it shouldn’t be forgotten that market players take action according to the future data that they foresee, not to the existing data. Demand in the market plays a role as the actual price determinant. Shortly; while the prices increase with the demand from China and Egypt in August and September, increasing demand from particularly Brazil and South America caused the prices continue to increase.   U.S. Department of Agriculture did not post the monthly forecast report as the government activities stopped. In the last report; the production estimation for 2013/14 season was explained as 708,89 million tons. In this production increase; while the high yield expectations for especially Canada and European Region came to the forefront, wheat consumption was expected to decrease 1,17 million tons. Shortly; when we reviewed the U.S. Department of Agriculture estimations, it was seen that while the wheat harvest increased, there wasn’t much change in the demand.   International Grain Council (IGC) expects that world wheat consumption will reach to 692,6 million tons with an increase of 1,7 million tons compared to previous month. In IGC data, an increase is forecast in the production unlike the data of U.S. Department of Agriculture. The reason of that is shown as the high wheat production in Black Sea and European Region. There is not any change to be expected in the world wheat trade. In spite of this, the increase in wheat stocks will reach to 4 million tons. Demand from China and increasing wheat production appears as an increase in stocks. IGC estimates that 2013/14 season wheat production will be above average. Nonetheless there are some reports about that  the wheat quality is low due to adverse weather conditions. As a result of that, wheat import and prices increase. China’s wheat import reached to 7,2 million tons. It is expected to reach 9,6 million tons until the end of the year. This figure points the highest wheat import of the recent years.   As a result; when the estimation average of the three intuitions that make global estimations in the grain markets is taken into consideration, average of the world wheat production  is expected to be 702,3 million tons. This figure points average 1,2 million-ton decrease compared to previous month. Last year’s average was realized as 656,7 million tons. When the estimated data are reviewed; even if there are different analyzes, it is seen that the main difference develops from the increasing demand. At this point; it is understood that demand from Brazil and China that I mentioned before undertakes a decisive role in wheat market. That how much it will be permanent will determine the direction of prices.   When we look at the developments on the demand side within this frame; it is seen that due to the wheat production decreases in Argentina and Russia and increasing demand from Brazil and China, recovery in prices continue. While demand from China increases the prices in Black Sea Region, demand from Brazil increases the prices in USA.   The recent increased rainfall and cold weather in Russia caused delays in the harvest. Due to the heavy rains, it is stated that Russia can face with a decrease of 4 million hectares cultivated area in 2013/14 season. This figure points 20 % decrease compared to previous year. According to Russian Ministry of Agriculture; 12,1 million hectare-area has been cultivated so far. Targeted cultivated land amount for this year was at 16,4 million hectare level. However, it is stated that cultivated land amount would decrease to 13 million hectare this year. This figure points the lowest cultivation of the last 20 years. When this article was being written, the price of wheat from Russia increased to 272,5 dollar per ton according to SovCon analysis company. In the Black Sea Region, wheat export price increased to 294 dollars. Shortly; the analysis points an increase of 17 % in wheat prices. It is observed that wheat prices increased due to the cultivated land loss.   Besides, wheat production in Argentina is estimated to be 8,8 million tons. It points 3,2 million tons lower level than the estimation of U.S. Department of Agriculture. It is announced that total cultivated land loss can reach to 100 thousand hectares. As a result of this; it is stated that Argentina can face with wheat deficit. Argentina consumes 6,05 million tons wheat in total. Also it keeps 700 thousand-ton wheat stock. However, Argentina is also an important wheat supplier in its own region. That is why wheat demands and prices showed a rapid increase in South America. Wheat price in Argentina was being traded for over 350 dollars per ton.   Brazil normally meets its wheat need by the wheat import from Argentina. However; due to the wheat deficit in Argentina, it turned to USA wheat. Import from USA causes increase in futures prices. According to the data of Food and Agriculture Organization of the United Nations (FAO); wheat production in Brazil is at 5,1 million levels. According to the data of U.S. Department of Agriculture, wheat import is 7,7 million tons in total. A great part of this import is provided by Argentina. Or it was! Now this import turned to USA.   Applications for wheat export in Europe in October reached 759 thousand. When this article was being written, total season export reached 7,3 million tons. This figure points 68 % decrease compared to last year. Buyer of the wheat from Europe is known as China and Northern African countries. Thus, it is understood that wheat demand in these countries is at high levels.  Besides, due to the productions costs of European wheat, it is relatively high. However; with the last increase in the prices, it is expected that wheat export from Europe will become competitive.   December futures wheat price at Chicago Mercantile Exchange increased to 710 cent/bushel resistance in September. Especially the increase movement started at 640 cent/bushel level, protected its power also in October. In case of that critical 710 cent/bushel level is exceeded, technical appearance would be more powerful. In this case; horizontal movement for the formation of a new base at 710 cent/bushel level can be seen. Otherwise; we can see price movements that are fluctuating and loosening in time. Four-year increasing trend line is at 635 cent/bushel level.   It is forecast that wheat prices will be fluctuating within 710-640 cent/bushel level during November. Continuation of world wheat demand to be remain strong and/or any decrease in wheat harvest may cause that 710 cent/bushel level is exceeded. However the general trend is estimated to be downward at a fluctuating level. We will continue to follow demand news and production forecasts.
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