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Eyes on the new season in the wheat market

08 May 20148 min reading
“The movement in the horizontal band is expected to continue during May. The tension between Ukraine and Russia will continue to be among the important topics. If the tension is lowered, the risk premium on wheat prices would be decreased. As a result, the investors will follow the three points in May: the tension between Russia and Ukraine, weather conditions and new production estimations.” The developments about Ukraine and production are effective on the markets. The upward trend that started in February continues. The increase of the possibility to see ‘El Nino’ in this year increases the concerns on the production. The production season in many countries has a risk of drought. We may see a fluctuating course in the futures transactions during this year. Nonetheless, the May-June period is seen as a breaking period for futures transaction. With the new season estimations announced in these months, wheat price decides its long-term trend. Thus the estimations on the new season are really important. However; it is not easy to make the estimations this year. Especially if the ‘El Nino’ was realized, it would be inevitable to have fluctuations in the production amounts. Therefore, it is important for the investors to determine the main trend and watch the trend. THE DROUGHT CONCERNS HAVE NOT AFFECTED THE USDA DATA Wheat production estimations of U.S. Department of Agriculture for 2013/14 season have not changed much. While wheat yield decreased 200 thousand tons compared to the previous month, the increase on annual basis reached to 56,02 million tons. According to that, world wheat production is expected to be 712,52 million tons in the new season. We see that drought concerns have not caused any change on the production estimations yet. Although the production remains almost the same, increase in the end period stocks is expected. End period stocks are estimated to be 186,68 million tons with an increase of 2,87 million tons. This means approximately 10 million tons of increase compared to the previous month. The decrease in the demand and trade and also high production increase the stocks. There is decline both on the consumption and trade sides compared to the previous month. Shortly, the demand decreases. According to the weekly export data of U.S. Department of Agriculture; wheat export decreased compared to the previous month. World wheat consumption declined 4,45 million tons compared to the previous month. There is decrease of 28,01 million tons compared to the previous year. This means 17,4% of the total world wheat export. The decrease in the wheat export is 1,16 million tons on the estimation report of this month but there is an increase of 23,49 million tons on annual basis. The increase on the export side provides support for the price despite the decrease in the consumption. When evaluated on country basis, there isn’t much fluctuation in the production. While China keeps its position as world’s largest wheat producer, India and USA follow it respectively. Ukraine’s wheat production is 22,28 million tons. While Ukraine realizes 3,1% of world wheat production, it realizes 5,9% of the wheat export. Especially in the recent periods, a great part of Egypt’s wheat purchases is met by Ukraine. Export figure of 9,5 million tons is very high in the wheat market where the highest import amount is 8,5 million tons. Thus, the developments in Ukraine disturb wheat market and are effective on the prices. Kazakhstan becomes prominent with increasing market share compared to the previous month. Wheat export estimation for Kazakhstan reached 7,5 million tons with an increase of 1 million tons compared to the previous month. IGC POINTS THAT THE DEMAND FROM CHINA DECREASED International Grains Council (IGC) expects world wheat production to decline to 697 million tons with a decrease of 3 million tons compared to the previous month. IGC price index decreased 2% on monthly basis. IGC’s production estimation for 2014/15 season declined 2%. Due to the decline in the usual high demand of China for wheat, import demand also decreases. Although the weather conditions in USA cause changes on the prices from time to time, wheat price decreased 2% on monthly basis. High supply and production estimations eliminate the concerns on Ukraine and weather conditions. Thus, a horizontal course was followed in April and there was not much change on the prices. The high point in IGC’s report is that it points the decreasing demand of China. Wheat consumption is estimated to reach to 701 million tons in the new season. World wheat trade is expected to reach to 144 million tons by increasing 1 million tons. However; despite the increase on monthly basis, wheat trade is still 7 million tons under the trade in the previous year. End period stocks are estimated to reach to 187 million tons. This figure points 3 million-ton decrease compared to the previous season. Thus, wheat stocks still continue to below the record stock level of 2011/12. IGC’s wheat price index is 246 in this period. Last year’s wheat index was at 258 levels. Price index is seen to decrease on annual and monthly basis. FAO FORESEES DECREASE IN WHEAT PRODUCTION OF CANADA On its monthly report, The United Nations Food and Agriculture Organization (FAO) decreased its world wheat production estimation to 716,1 million tons by declining 100 thousand tons. FAO’s giving separate references for the year 2014 and 2014 season on its report causes data confusion. End period stocks in 2013/14 season are estimated to reach to 179,9 million tons. In other words, approximately 21,6 million-ton increase is foreseen compared to the previous season. Despite that, end period stocks are estimated to still remain under 2011 and 2012. FAO points that wheat production may decrease 22% due to the reduction in the cultivated lands in Canada. This is quite a remarkable point as Canada is known as one of the important wheat producers. Wheat price may be expected to be affected from a situation like that. Despite the adverse weather conditions in USA, wheat production is estimated to increase 3,5%. In Australia, drought is expected to decrease the production. There are expectations for a high production in China and India. The wheat production in Ukraine, Russia and Kazakhstan is emphasized to decrease. The world wheat supply is expected to reach to 874,4 million tons on the report. This figure points the second highest supply amount after 2011/12 season. WORLD WHEAT PRODUCTION AVERAGE IS 708,5 MILLION TONS As a result; when the estimation averages of the three institutions making global estimations about the grain markets are taken into consideration, world wheat production average is expected to be 708,54 million tons. It is seen that there hasn’t been much change compared to the previous month. There is only an increase of 300 thousand tons. Last year’s average was realized as 656,7 million tons. 51,84 million-ton increase is projected compared to the previous year. In other words, the increase will be 7,89% on annual basis. This month’s data points the balance between the demand and production. It is seen that the tension between Ukraine and Russia and the drought concerns are balanced with the increasing demand. Besides, the emphasize on the decrease of the import from China and estimations of production decreases in the countries like Canada draw attention. We see that weather conditions also play a significant role on the estimations. There may be fluctuations on the prices and estimations due to the drought and changes in the air temperature. However, it is estimated that high yield will put pressure on the prices and limit the excessive increases. WEATHER CONDITIONS CONTINUE TO AFFECT THE PRICES July futures wheat price on the Chicago Mercantile Exchange moves above the 670 cent/bushel level. This level is accepted as the reference point. It is seen that the purchases increase by getting closer to this level. For the upward movements, 720 cent/bushel level maintains its importance. Although the tension between Ukraine and Russia brings the price closer to this level, ongoing high production forecast caused increase in the short positions. Thus, we watch that short-term speculative movements also increased. Ukraine is an important wheat and corn country. It concerned that the increasing tension in this region may affect the wheat production and deliveries. In addition to this, weather conditions are followed closely by the investors. It was seen that the changes on the weather conditions were effective on the prices in April. It is not expected to experience a breaking on the horizontal band before the new estimations on 2014/15 season will be made. EYES ON THE NEW SEASON ESTIMATIONS The movement on the horizontal band is expected to continue during May. The direction of the movement will become more visible together with the new season forecasts towards the end of month. In this instance, upward or downward aggressive movements can be seen. Besides, it is possible for the changes on the weather conditions to be used by causing profit selling or response purchases. The tension between Ukraine and Russia will continue to be among the important topics in May. If the tension is lowered, the risk premium on wheat prices would be decreased. As a result, the investors will follow the three points in May: the tension between Russia and Ukraine, weather conditions and new production estimations.
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