High production estimations increase the sales trend

06 June 20147 min reading
Zafer ERGEZEN Futures and Commodity Market Specialist “June period is seen generally as the month when the trend direction in wheat prices is determined. For this reason, the trend direction will be determined in this month. However, it can be said that sales pressure will be high when taking estimation reports for 2014/15 season as basis. Thus, it is estimated that 650 cent/bushel level won’t remain much.” Increasing concerns on production have become the most important issue of the wheat industry. It is seen that sales increased in the wheat transactions together with the announcement of the first estimation data for 2014/15 season. Especially the second half of May was affected from these sales. Although the developments about Ukraine created pressure on the wheat prices, the decrease in the tension here was effective on the increase of the sales. As usual, June has critical importance on determining the trend in wheat prices. The reason of that is the estimation reports to be announced in this period for the new season. When this year’s estimation report is reviewed, it points high production. The first response of the wheat market was realized as sales. It is estimated that the production in 2014/15 season will be below the production in the previous year in general. The drought signs in some countries cause decrease in the production in those countries. However, there is still a high production level. This amount points a production above the expectations. A downward trend is expected in prices in general due to this high production. THE INCREASE IN THE STOCKS CREATES SALES PRESSURE First estimation report of U.S. Department of Agriculture for 2014/15 season has been announced. As this report is the most detailed one in the market, it is followed closely by the investors. Besides it gains importance as it provides the most accurate data on the production of U.S. that is one of world’s largest wheat producers. When 2014/15 data is reviewed; it points a significant increase in the production. According to the report of U.S. Department of Agriculture; 16,96 million-ton decrease is expected in the world wheat production. Thus, world wheat production will decline to 697,04 million tons. Shortly, a significant wheat production has been experienced for the last two years. It is seen that stocks have also increased. End period stocks are projected to increase to 187,42 million tons in 2014/15 season. This figure means an increase of 890 thousand tons. It highly exceeded the stocks two years ago. It seems inevitable for a stock figure with such amount to create sales pressure on the wheat prices. It is already seen that sales increased as soon as the estimations were announced. A steady increase in stocks is seen as the biggest risk on the prices. This sales pressure shall be estimated to continue in case there is not an increase on the demand side. We have been seeing signals of this for the last two weeks. Canada leads with the production decrease of approximately 9 million tons. Whereas, it was effective on the decrease of the prices together with high production data in the previous season. It is estimated that production will decrease in U.S. as well. According to the estimations of U.S. Department of Agriculture; wheat production will decrease 4,53 million tons. These two countries meet 80% of the decrease in the production by themselves. Thus the market would follow the data from those countries closely. The production data from those countries in this year may be affective on the prices. The biggest source of the increase in the stocks causing the start of a downward trend in the prices is China! When the data of 2014/15 season is reviewed; it is expected to have 4 million-ton increase in the end period stocks of China. This figure corresponds half of the annual wheat import. In other words, it means half of the demand of the country which makes the highest wheat import. An increase with such amount affects the prices naturally. China continues to be an important player affecting the prices in the wheat market and will continue throughout this year. To sum up, first estimation report of U.S. Department of Agriculture for 2014/15 season has caused increase of the sales. When it is taken into consideration that this report determines the trend direction in general, its effect on the market will be understood more clearly. THE HIGHEST PRODUCTION DECREASE IS IN CANADA The United Nations Food and Agriculture Organization (FAO) decreased its world wheat production estimation to 701,7 million tons by declining 1,9% compared to the previous year. The highest decrease is expected in Canada. Thus, it is seen that both these two institutions point a significant production decrease in Canada. Besides that, it is estimated that there will be decrease in Australia, Russia and U.S. as well. Thus, the production increase in Argentina, Brazil, India and Mexico has been met. A decrease in the wheat trade together with the decrease in the production is also projected. Wheat trade is expected to decrease to 149,5 million tons with a decline of 1 million tons. End period stocks are estimated to reach 179,5 million tons in 2013/14 season. This figure means approximately 2 million-ton increase compared to the previous season. However, it is far below the estimations of U.S. Department of Agriculture. While the wheat demand in Asian countries still continues, a decrease in the demand from Europe is also expected. Despite the uncertainty in Ukraine, the country is expected to continue its loads steadily. THE INCREASE ON ANNUAL BASIS WILL BE 6,50% Consequently, when the estimation average of the two institutions making global estimations in the grain markets is taken into consideration; world wheat production is expected to be 699,37 million tons averagely. There is a significant decrease compared to the previous month. Estimations for the new season are effective on that. There is only 300 thousand-ton increase. Last year’s average was realized as 656,7 million tons. 46,67 million-ton increase is projected compared to the previous year. In other words, the increase on annual basis will be 6,50%. Increase compared to the last year’s estimations points sales pressure naturally. Addressing the decrease in the imports from China and estimations of production decrease in the countries like Canada gains importance. These two countries were effective on the prices in the previous season. They are estimated to play important roles again this year. Besides, we see that weather conditions have also had important role on the estimations this year. There can be fluctuations in the prices and the estimations due to the drought and changes in the weather temperatures. However, it is estimated that high yield will create pressure on the prices and limit the excessive increases. JUNE WILL DIRECT WEHAT PRICES July futures wheat price at Chicago Mercantile Exchange decreased below the level of 665 cent/bushel as the critical level. This level was used as support point previously for many times. While the prices were receding; in spite of the support at this level, this support was passed downward due to the increasing production concerns. There is 650 cent/bushel level under this level. Response purchases may be expected to be seen at this level. However, the increases are possible to remain as being response purchase. The increase in the transaction volume during the decrease is a negative signal. As I stated previously, June period is seen generally as the month when the trend direction in wheat prices is determined. For this reason, the trend direction will be determined in this month. However, it can be said that sales pressure will be high when taking estimation reports for 2014/15 season as basis. Thus, it is estimated that 650 cent/bushel level won’t remain much. In case of passing this level, there can be downward aggressive movements. Also it is possible for the unforeseen developments of the weather conditions to be used a reason to response purchases. However, the main effective of the wheat price was announced in May: Production estimations… As long as expectations for production forecasts and stocks are higher, upward movements can be said to be limited.
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