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Global economy and demand concerns determines the market

14 September 20157 min reading
“Chicago Commodity Exchange is trying to keep wheat price for September above 500 cent/bushel level. In case this level become downwardly, sales can intensify and a new decline trend appear. Without relieving concerns about economy and therefore demands, a healthy rise should not be expected. Namely, investors should closely follow not only production estimates and weather conditions in the following period, but also exchange rates and economic developments.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Wheat prices followed a fluctuating course in August. Wheat price which was closed with 622 dollars in June 30 reached to 488,25 dollars in August 12. So that a decline of 21,5 percent was seen in a short period. It is not right to explain hard sales realized in this period only with production amounts. Exchange activities in global markets and especially China-based economic concerns have also impacted sales. That US Dollar gained value causes selling pressure on wheat price to increase. Besides, concern about China economy is seen as another factor impacting wheat demand because China shares nearly 18 percent of global wheat production. 40 percent of global wheat stocks are owned by China. There are concerns that wheat stocks might be reduced together with disruption in Chinese economy. Before this, however, wheat demand of China is decreasing. August passed with less turmoil in comparison to the previous month. It is seen that the price is trying to remain around 500 cent/bushel. This level was tested in May and June too. That estimates about production and stocks as to the first announcements changed caused sales to increase. After the first estimates for the new season, global concerns caused stock estimates to increase. After that, thanks to suitable weather conditions, production has increased too. So that production estimates helped selling pressure increase. WHEAT PRICES ARE STRONG IN TURKEY Prices in Turkey continue to stay strong compared to global markets. Fluctuations in wheat prices in two-month period did not reflect on local prices much. It is seen that wheat purchase prices in Thrace Region did not change much compared to the early months of 2014. We see that wheat prices have retreated a little in Central Anatolia Region. It is thought the fact that local prices stayed high despite the decline in global prices is resulted from increase in domestic demand and limited wheat import. Especially when the number of immigrant coming from Syria has reached 2 million, increase in demand seems normal. New demand with this amount causes bread-flour-wheat demand to increase. It is understood that imports from abroad do not show any increase in the same rate. Support purchase price was not announced last year due to high prices caused by drought last year. For 2015, intervention purchase price for Anatolian red hard wheat numbered 2 was determined as 862 TL. Wheat production increases in Turkey: According to the estimates of Turkish Grain Board (TMO) wheat production is expected to reach 22,5 million tons with an increase of 18 percent compared to the previous year. PRODUCTION AND STOCKS INCREASE According to the estimate report announced by USA Department of Agriculture (USDA), production amount showed an increase of 4,59 million tons compared to the previous year. So that production amount exceeded the last years’ amount by increasing to 726,55 million tons. While it increased 1,3 million tons compared to the previous year increase amount of 2012 reached to 68,61 million tons. When it is thought that production amount of Turkey is 22,5 million tons, the size of increase compared to 2012 would be understood more precisely. Increase trend in end of stocks continues. Showing a sharp rise last month, stocks are expected to be 221,47 million tons by increasing 1,66 million tons. when the last two months’ estimated considered, It is seen that increase amount in wheat stocks has reached 19,07 million tons. The reason why there is such a variance in estimates is the slowdown in Chinese economy. This increase mostly caused by increase in Chinese stocks. As I mentioned before, wheat demand is expected to decrease along with the disruption in Chinese economy. Wheat consumption is expected to reduce to 116,5 million tons. According to the early estimates announced for the new season, consumption in Chine decreased 16,3 million tons. In short, slowdown in Chine was not included in estimates but now it is… China will consume 16 percent of global wheat production by itself. 40 percent of global wheat stocks are owned by China. So, it is inevitable that any slowdown in Chinese economy impact global wheat demand negatively. In the new season, the world’s top wheat producers will be European Region, China and India. Nearly half of global wheat production will be realized in these three regions. These three regions are also the top wheat consumer countries. More consumption, however, means more import due to production. It is estimated that the top wheat importers will be North Africa, Middle East and Southeastern Asia. MONTHLY HIGH FLUCTUATIONS INCREASE THE RISK International Grain Council (IGC) reduced wheat production estimates to 710 million tons by decreasing 1 million tons compared to the previous month. Fluctuations in estimates of USDA can be seen in IGC’s estimates. However the latest estimates seem to be steadier. Besides, to see the end of month estimates would be more suitable due to Chinese impact and global demand concerns in August. In IGC’s estimates, end of stocks rose to 201 million tons by increasing 5 million tons compared to the previous month. Namely, estimates that decreased in the previous month increased again. The fact that monthly estimates changed so points out a serious uncertainty. As institutions that make predictions announced too different estimates despite their detailed data, investors should take minimum risks in their transactions. Moreover, it should be stated IGC data points that end of stocks will increase 30 million tons compared to 2012. Estimates of World Food and Agriculture Organization (FAO) were not announced in August. According to the estimates in the previous month, global wheat production is expected to reach 723,4 million tons. As to the estimates of FAO, end of stocks will be 197,5 million tons. GLOBAL ECONOMY AND DEMAND As a result, when the average estimates of three institutions making global predictions about grain markets considered, global wheat production is expected to be 719, 98 million tons. According to the estimates of previous months, there is an increase of 1,21 million tons. End of stocks will also reach to 206,66 million tons. Namely, it is estimated that stock increase will be 2,26 million more when compared to the previous month. In short, while increase in production is expected compared to the previous month, end of stocks seem to have increased. Chicago Commodity Exchange is trying to keep wheat price for September above 500 cent/bushel level. Being closer to this level, purchases become effective. This level had been seen in May and June too. In case this level become downwardly, sales can intensify and a new decline trend appear. Without relieving concerns about economy and therefore demands, a healthy rise should not be expected. Namely, investors should closely follow not only production estimates and weather conditions in the following period, but also exchange rates and economic developments. As I mentioned before, fluctuations in estimates of prediction institutions point out the uncertainty in the market. Thus, investors should be stay away from risks as far as possible.
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