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Increase in production and inadequacy in demands increases selling pressure

04 November 20157 min reading
“While production forecasts increase demand expectations reduce and this strengthens the estimates that selling pressure will be more effective. Downturn in Chinese economy, strengthening dollar and record production estimates may influence derivatives markets. Therefore, as long as there is not a serious effect in weather conditions, I believe that selling pressure will be effective. Fluctuations in money markets may cause a short term fluctuations in derivatives wheat markets.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Wheat price decreased again due to selling after it increased to the level of 531 cent/bushel in October. Sales starting from this level decreased below 500 cent/bushel level. Along with the news that USA Central Bank (FED) will not increase interests, wheat prices started an upward movement. Increasing global risks and demand concerns, however, caused sales to rise. We have particularly seen that China based concerns affected global markets considerably. As Chinese economy slows down, commodity demands are expected to decrease. In China which is the world’s largest commodity importer, we have already seen sharp sales in commodity prices because China shares nearly 18 percent of global wheat production. Moreover, China has also 40 percent of global wheat stocks. However, we see that the stress in the market is not decreasing despite the latest developments. In the latest forecast reports, increasing production forecasts affected the selling pressure to rise. In fact, a revision in production forecasts had been expected due to El Nino in particular. However, we have seen that El Nino is not as effective on forecasts as expected. In this aspect, it is a fact that demands based concerns are more effective than supply based concerns! Besides this data, dynamism in currency market can be considered as another factor effective on prices. Changes in exchanges in global markets influence wheat demand too. US Dollar is expected to be on rise. Along with that interest decision has been postponed, however, we have seen that selling pressure in dollar supported purchases in wheat prices. Although dollar has decreased in value it still has higher value than the other currencies compared to the beginning of the season. This also influences the demands relatively. DYNAMISM IN DOMESTIC DEMAND KEEPS THE MARKET STRONG As I noted in my former articles, prices in Turkey continues to be strong as to the global markets. That domestic demand is dynamic despite high production estimates should be considered as the most significant factor. Moreover, increase in the number of refugees and food support provided by Turkey for refugees continue to help keeping the prices high. Along with the increased population, we see that demand for staple food such as wheat and flour is high. Wheat production will be higher in Turkey compared to the previous season. As to the estimates of Turkish Grain Board (TMO), wheat production is forecasted to reach 22.5 million tons in 2015 increasing 18 percent compared to previous year. TMO has purchased 3.3 million tons of wheat so far for 2015. The most wheat selling branch became Diyarbakır with 404 thousand tons. The amount of bread wheat purchases which shares most of TMO’s wheat purchases is recorded as 1.8 million tons. TMO is expected to pay 2 billion 750 million lira to the producers in return of purchases in 2015. WHEAT PRODUCTION AMOUNT AND STOCKS CONTINUE TO INCREASE According to the forecast report announced by US Department of Agriculture (USDA), global wheat production amount showed an increase of 1.18 million tons compared to the previous month. Thus, production amount rose to 732.79 million tons. Increase in production estimates of the last three months reached 10.83 million tons. Therefore, production amount is expected to exceed last season’s amount. That increase in production is 74.70 million tons compared to 2012 is another remarkable issue. This amount is equal to 10 percent of global wheat production. The increase amount of the last three months clarifies the decrease in prices. Increase in wheat production estimates is caused mostly from Australia, Europe and Canada. Decrease in USA is remarkable! Especially with the effect of weather conditions, USA wheat production is expected to decrease 2.29 million tons compared to the previous estimates. Despite this, that selling pressure is effective in futures markets can only be explained with insufficient demands. End of stocks are also on rise. End of stocks reached 228.49 million tons increasing 1.93 million as to the new forecast reports. When the last two months’ forecasts considered, it seems that wheat stocks increased 26.09 million tons. It is clear that increase in the forecasts affected stocks directly. That the demands are uncertain especially in North Africa where the major wheat importers exist is another significant factor in increasing stocks. Moreover, it is seen that stocks are increasing due to demands in Ukraine. In short, estimates for stocks increased along with the increase in production in September. When the world’s major wheat consumer China considered, we see that wheat purchase expectations aimed for stocking have increased. China will produce 16 percent of global wheat production itself. As we mentioned above, China has 40 percent of global wheat stocks. In the new season the major wheat producers will be European region, China and India again. Nearly half of the global wheat production will be realized in these three regions. It is estimated that the highest wheat imports will be realized by North Africa, Middle East and Southeastern Asia again. INCREASE IN DEMANDS FOLLOWS INCREASE IN PRODUCTION International Grain Council (IGC) had not announced its updated estimates yet when this article was prepared. IGC increased its wheat production estimates for September to 727 million tons with an increase of 7 million; end of stocks to 211 million tons with an increase of 5 million compared to previous month. Increase of last two months’ stock estimates was remarkable. Starting particularly with China based demand concerns, global demand concerns are considered as the reason for that. Another interesting point is that end of stocks point out an increase of 35 million tons compared to 2012. It is understood that while global wheat production increases the demands do not increase in the same amount. DECREASE IN DEMANDS REFLECTED UPON FAO ESTIMATES TOO Food and Agriculture Organization of United Nations (FAO) estimates that global wheat production will be around 734.8 million tons. In other words, there is an increase of 6.4 million tons compared to the estimates for September. This shows a sharp increase compared to the estimates for the previous month. Therefore, it is expected that last year’s record production amount will be exceeded. It is noted that production expectations in China and Europe are caused by increase in production. According to the estimates, end of stocks will increase to 205.9 million tons. Compared to previous estimates, an increase of 4.1 million tons is expected. Thus, total wheat supply will reach 937.4 million tons. FAO forecasts an increase of 1.9 million tons compared to previous year while forecasts an increase of 3.3 million tons for end of stocks. In short, FAO also takes the decrease of demand into consideration contrary to previous months. AVERAGE GLOBAL WHEAT PRODUCTION IS 731.53 MILLION TONS Consequently, when average of estimates of the three institutions making global forecasts about grain markets considered global wheat production is expected to be 731.53 million tons on average. Compared to the estimates for previous month, there is an increase of 2.53 million tons. End of stocks will reach 215.13 million tons. In other words, it is estimated that there will be an increase of 2.01 million in stocks compared to previous month. In short, it seems that both production amount and end of stock expectations increased compared to the estimates for previous month. Wheat price for December in Chicago Commodity Exchange decreased below 500 cent/bushel again. The level of 500 cent/bushel will continue to be considered as a reference. However, while there is an increase in production estimates, decreasing demand forecasts cause estimates about that selling pressure will be more effective. Especially economic downturn in China, growing value of dollar, record production estimates may affect derivatives markets. Therefore, I still believe that selling pressure will be effective as long as weather conditions are not affected seriously in short term. Fluctuations in money markets may cause a short term fluctuation in wheat derivatives.
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