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Global market fluctuation must be closely followed

01 July 20168 min reading
“Worldwide wheat production is expected to be 725.61 million tons. An increase of 5.31 tons is anticipated compared to the previous month. The period-end stock will rise to 232.13 million tons. Briefly, it is expected to increase up to 8.62 million tons.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Wheat has experienced a marvellous month. Wheat prices which are deferred for September experienced a raise in the beginning of June and achieved to surpass 530 cent/bushel level. The increase was more than 10 percent. The following sales wave became far more efficient. Wheat prices regressed to 455 cent/bushel level. It refers to an approximate fall of 14 percent. This fluctuation which took place in a very short time led to the loss of many investors. Weather condition was one of the important reasons for the increase in prices. Due to the rainy weather in Europe, the concern about production was escalated. There were news of a decrease in production especially for France and Germany. Moreover, people worried about the wheat quality due to the rainfall. Yet, Europe was not the sole area affected by weather conditions: South and North America were also affected negatively. The weather was among the most discussed topics in Far East countries. As the monsoon rains were scarce in India, there were rumours about a decrease in wheat production. When we consider these aspects, we conclude that weather condition in all around the world is a variance which affects wheat prices. However, the sales became effective again when the new production estimates were announced. In spite of all the concerns about weather conditions and news about possible decrease in production, the production estimates were increased. Besides, expectation about surplus production in the new season went up due to low demand. The increase of the expectation about surplus production reflected in wheat prices as a decrease. Furthermore, Britain held a referendum in June and decided to leave the European Union. This case also affects the process in a negative way. The UK’s decision to leave the EU will definitely increase the cost of goods circulation and timed transactions. This event may affect the demand rates negatively. The reflections can be observed on timed transactions. There is a great demand in Turkey for a long time. Due to this demand, wheat prices also resist against decreasing. Wheat prices survived to stay above definite levels for nearly two years. A price movement is formed as being independent from the concerns about production and quality in global markets. The high production expectations in Turkey did not also cause pressure on the prices this year. According to the estimates by Turkish Grain Board (TMO), it was stated that wheat production in 2015 would increase up to 18% compared to last year and reach to 22.5 million tons. As the prices stay high despite the increase in production, it points out that the demand is not a temporary act, but a permanent fact. The increase in immigrant population could be a reason. This leads to an increase in demand for wheat consumption. When we consider this expect, a decrease in production and demand is not expected in either long or short term. So, the sales pressure on domestic wheat price does not seem probable. As a result, I assume that the prices in Turkey will stay strong irrespective of the situation in international markets in 2016. AN INCREASE OF 7.58 MILLION TONS IS ESTIMATED IN PRODUCTION According to the report by U.S. Department of Agriculture (USDA) about the next season, the production estimates were increased by 3.84 million tons. So, the expectation about a decrease in production regressed to 3.22 million tons compared to the previous season. Wheat production is anticipated to be 730.83 million tons for the next year. However, there is an important detail which is mostly neglected: production estimates were increased by 7.58 million tons in the last nine months. That is to say, despite the decrease occurred between the last estimation of the previous season and the expectation of the new season, an increase in production is anticipated compared to the result occurred nine months ago. We already witness its reflection on timed transactions. Also the rise in production is still high compared to 2012; and the rise was equal to 70.82 million tons. When we assume that the annual wheat production in Turkey is approximately 20 million tons, we can understand the effect of this rise better. As we analyze the presumptions about the next season, we see that the actual reason behind the rise of production expectations roots in the USA. Moreover, there is an increase in production expectation in Europe. It is understood that the weather in the beginning of the month is not actually efficient. According to the same report, the period-end stock expectations increased to 257.8 million tons by rising nearly 500 thousand. So, the increased amount in wheat stocks became 34.96 million tons in the last eight months. I previously stated that the increase in the stocks would definitely affect the timed markets. Unfortunately, June became the period that my expectation was realized. The increase in wheat stocks fall behind the increase in production. It may seem like a positive event from this aspect. It shows us a recovery in terms of demand. The wheat stocks in China will reach out to 118 million tons in the next season. This number corresponds to 46 percent of the worldwide wheat stocks. North Africa, South-eastern Asia and Middle East will continue to be the biggest wheat importers. European region (including Ukraine and Russia) preserves the title of being the biggest exporter. European region, China and India will nearly actualize the half of the worldwide wheat production. THE DEMAND FOR THE WHEAT INCREASES IN THE WORLD International Grains Council (IGC) anticipates that the worldwide wheat production in 2016-17 seasons would become 722 million tons. There is an increase of approximately 5 million tons compared to the previous expectations. When we analyze the results of the previous year, we see that the decrease in production regressed to 12 million tons. Namely, IGC advanced its expectations up to 11 million tons following the assumptions about the new season. Such a correction after the first assumptions points out to a serious deviation. Period-end stocks increased 5 million tons compared to last month and became 223 million tons. Despite the production decreased in comparison to last year, the period-end stocks reached out the highest level of the last five years. Briefly, it is observed that there is a serious decrease in demand. The period-end stock in 2012 was 170 million tons and it will reach to 223 million tons in 2017. So, the increase in wheat stock will be approximately 53 million tons. Briefly, the demand for wheat will keep becoming high in worldwide wheat market. “THE VOLUME OF FLUCTUATION INCREASES” According to the estimates by Food and Agricultural Organization (FAO) the worldwide wheat production will increase by 7.1 million and become 724 million tons in 2016-17 season. Yet, the most striking fact is about expectations on stocks. As for the estimates by FAO, the end-period stocks will rise to 215.6 million tons. An increase of 20.4 million tons is expected compared to the previous expectations. Going through such a big change on a monthly basis leads to the pressure on the prices and enhances the volume of fluctuation. It is stated that Argentina, European region and Russia is effective in production. It is also indicated that the stocks in the beginning of the period is only 1.8 million tons lower than the highest of level of all the time. WORLDWIDE WHEAT PRODUCTION IS ANTICIPATED TO BE 725.61 MILLION TONS As a result, when we consider the estimation averages of three institutions which realize global estimations for grain markets, worldwide wheat production is expected to be 725.61 million tons. An increase of 5.31 tons is anticipated compared to the previous month. The period-end stock will rise to 232.13 million tons. Briefly, it is expected to increase up to 8.62 million tons. If the wheat price timed for September by Chicago Commodity Exchange do not come up to 465-470 cent/bushel level, the sales pressure may continue. It is also predicted that reaction sales can occur following the harsh fall in June. However, the rising effects of reaction sales and position closures and whether they are placed in horizontal bands are still questionable matters. In the case that the increase in estimation report continues, we can see that sales pressure is efficient again. Also, the effects of global market fluctuation must be closely followed. Especially following the UK’s decision the leave the EU, we must never forget the possibility that central banks may provide more liquidity for the markets. As the decision for interest rate affects the currencies and liquidity, it has a tremendous effect on commodities. It is significantly important for the investors to closely follow the announcements by the central banks and the new estimations about production.
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