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High production amount and dollar’s gaining value increase the pressure

13 January 20167 min reading
“For wheat price in March, 490-500 cent/bushel level became prominent in Chicago Commodities Exchange. This price level has become a reference. However, we can see a downward movement in new production estimates. In this aspect, new response purchases can be seen. Especially weakening developing countries may cause selling pressure to increase by affecting the demands negatively.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Wheat price could not successfully increase in December. Trying 499 cent/bushel level several times, wheat price encountered sales which prevent this level to be exceeded. The sales pressure which starts after the new production estimates were announced continues its effect. The level of 490-500 cent/bushel has become a significant reference point. The fact that the economy of developing countries weakens; growing power of dollar and record production estimates cause sales pressure be effective. Finally USA Federal Reserve increased interest rates in December. This had been a concern for markets for a long time. Along with the increase in interest rates, we have seen that sales increased in commodity markets and dollar became more powerful. Dollar gains value in comparison to the other currencies. Along with dollar’s gaining value, commodities of which prices are determined on dollar basis lose value because the cost and price of wheat produced in other countries decrease too. In addition, production estimates continue in high levels. Although production amounts are in record levels there has been an upward movement in production estimates. Good weather conditions seem to be the main reason for production increase. Although El Nino has affected the production of some commodities negatively it affects wheat production positively. HIGH DEMANDS IN TURKEY As I mentioned several times before, prices in Turkey protects its horizontal trend. We see that a strong demand continues in Turkish market; demand for basic products such as wheat and flour is very high. Despite high production expectations, a strong movement points out the significant demand. Especially with the rise in the number of refugees, an increase in demand can be estimated. Considering the wheat production estimates, high production is expected to continue. According to the estimates of Turkish Grain Board (TMO) wheat production is expected to reach 22.5 million tons in 2015 with an increase of 18 percent compared to the previous year. This amount is the highest one so far. Despite this, high prices indicate how high the demands which we mentioned are. TMO purchases have also reached at 14.6 percent of total production. TMO has purchased 3.3 million tons of wheat so far for 2015. The branch with highest purchase level is Diyarbakır with 404 thousand tons. Bread wheat purchases which constitute the majority of TMO’s wheat purchases were recorded as 1.8 million tons. TMO is expected to pay 2 billion 750 million Lira in return of purchases at the end of 2015. INCREASE OF 12.9 MILLION TONS IN PRODUCTION ESTIMATES According to the estimate report published by US Department of Agriculture (USDA), production amount showed an increase of 1.95 million tons compared to the previous month. Thus the production amount increased to 734.93 million tons. Increase in production estimates of the last three months has reached 12.97 million tons. The production amount is expected to exceed the last year’s amount. Compared to 2012, increase in production reached at 76.21 million tons. This amount is equal to 10 percent of wheat production. The rise in this amount in the last three years turns out to be the main reason of the decrease in prices. Production estimates in Europe and Canada also increased. Especially in Canada, it is seen that production amount exceeded the estimates. Likewise, estimates for end of period stocks also increased. End of period stocks rose to 229.86 with an increase of 2.56 million tons. Therefore, the rise in wheat stocks has reached at 27.46 million tons in the last three months. Rise in wheat stocks is caused by Europe and Canada. Starting from this, wheat demand is not expected to change much despite the rise in production estimates. As a result, increased wheat demand compared to the previous month causes stocks increase too. China will continue to be the world’s biggest wheat consumer again. China consumes 16 percent of global wheat production itself. China holds 40 percent of global wheat stocks. North Africa and Middle East will continue to be the world’s biggest wheat importers. Both demand and production amount in these countries are expected to remain the same. In short, while increase production continues, increase in consumption estimates caused an increase of stocks too. In the new season, the world’s biggest wheat producers will be Europe, China and India again. Nearly half of the global wheat production will be realized in these three regions. It is estimated that most of the wheat import will be realized by North Africa, Middle East and South Eastern Asia. THE HIGHEST PRODUCTION AMOUNT OF THE LAST 5 YEARS International Grain Council (IGC) did not announce wheat production estimates. Estimates which are announced in November did not show many changes. In this aspect, it is possible to say that IGC’s estimates for wheat market remain stable. Along with this, record levels of estimates are expected. IGC estimates the world production to be 726 million tons. This amount indicates the highest production amount of the last five years. End of period stocks reduced to 208 million with a decrease of 1 million compared to the previous month. Although end of period stocks decreased compared to the previous month, they are still high. End of period stocks which were 170 million tons in 2012 reached at 208 million tons in 2016. Therefore, it will increase 38 million tons. This amount is equal to 23.9 percent of global wheat import. In this aspect, it is estimated that there will be a significant demand for wheat in global wheat market. As might be expected, this may create selling pressure on prices. We have seen that low demand has created selling pressure on prices. TOTAL WHEAT SUPPLY IS 937.5 MILLION TONS According to the estimates of United Nations Food and Agriculture Organization (FAO), global wheat production is estimated to be 734.5 million tons. According to the data of it decreased 1.7 million tons. However, despite to the decrease in production estimates, it is expected to be the highest production amount in the last five years. It is stated that the decrease in production estimates is caused by improper weather conditions in Pakistan, Brazil and Argentina. According to the estimates of FAO, end of period stocks will decrease to 206.9 million tons. Compared to the previous estimates, a decrease of 500 thousand is expected. Therefore, total wheat supply will decrease to 937.5 million tons. Finally, considering the average estimates of the three institutions which make global estimates for cereals markets, global wheat production is expected to be 731.81 million tons. There is only a growth of 8 thousand tons compared to the previous estimates. End of period stocks will also 214.92 million tons. Namely, it is estimated that there will be an increase of 690 thousand tons in stocks compared to the previous month. 490-500 CENT/BUSHEL IS THE REFERENCE POINT For wheat price in March, 490-500 cent/bushel level became prominent in Chicago Commodities Exchange. This price level has become a reference. 465 cent/bushel level’s downward movement will cause searching for lowest prices. The fact that 490-500 cent/bushel level cannot be exceeded causes selling pressure to increase. However, we can see a downward movement in new production estimates. In this aspect, new response purchases can be seen. Therefore, the market will follow the new production estimates closely. Along with the high production estimates, dollar’s getting stronger leads the idea that selling pressure may be more effective. Especially weakening developing countries may cause selling pressure to increase by affecting the demands negatively.
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