Interest rate decisions will continue to impact on the market
31 May 20168 min reading
“In the upward price movements, respectively, 485 cent/bushel level stands out. In the Downward movements, however, 450-455 cent/bushel band comes forward. Nevertheless, FED’s interest rate decisions will continue to impact on the market. Due to the fact that an interest rate decision affects the currencies and liquidity, it has a significant impact on the commodities.”
Futures and Commodity Market Specialist
Wheat price followed a fluctuating course again in May. It is observed that a fluctuating course has occurred in the horizontal market since February. After the recent purchases In April, this horizontal band has been returned into again. In April issue, I had stated that especially 445-450 cent/bushel price range was important. We are monitoring that purchases are strengthened as the wheat price gets closer to this region. It can be seen that buyers are gathered in the 455 cent/bushel level. Getting started with the month of May, economic expectations was effective in the increase of the sales pressure. There was an increase in expectations for the US Central Bank’s (the FED) raising the interest rates. After these expectations we saw that the U.S. dollar strengthened. Whereas the FED's turning into a more rigid style gave rise to sale in commodity prices, on the contrary situation, purchases are increasing. As long as the liquidity turning to asset prices decreases, we will continue to see the trend of sale on the commodity prices. In May we have also seen news of an increase in expectations for production. There have been increases in estimations of wheat production in the European region. There are positive expectations for production in this region. It is expected that the wheat cultivated fields in Argentina to reach the highest level after 2007, as well. Argentina, stands out as an important export country. In another exporting country, Ukraine, too, there are expectations as to the fact that export will increase on an annual basis.
THE STRONG COURSE CONTINUOUS IN TURKEY
In Turkey, however, the strong course that we have now been used to is ongoing. Whereas fluctuating course prevails abroad, we monitor that the prices remain at a certain level in Turkey, and that fluctuating is less. As I explained in the previous months, the biggest reason of this is seen as strong demand. The increase experienced in consumption is reflected on demand, as well. The increase in the number of immigrants, in particular, has led to a strengthening of the demand for wheat. However, production in Turkey is expected to be high this year, as well. In accordance with the estimations of Soil Products Office (TMO), it had been announced that the wheat production in 2015 could reach 22, 5 million tons with an increase of 18% compared to last year. The fact that the prices remain high despite an increase in production points to the persistent demand expectations. With the expectation that the prices will remain high, wheat purchase price may not be announced by TMO this year, either. I am speculating that the prices for Turkey will remain strong independently from the international markets in 2016, as well. The fact that there is a lack of a significant change in global production forecasts reinforces this expectation even more.
WHEAT PRODUCTION HAS DECLINED TO 726, 99 MILLION TONS
The U.S. Department of Agriculture (USDA) announced its first expectations for next season. According to estimates report published by the institution the amount of the production showed a decline of 7,06 million tons compared to the previous year. Thus, production fell to an estimated 726.99 million tons. The increase in production forecasts for the last eight months was 3,74 million tons. The increase in production in the last eight months had already been reflected on the future deliveries as the sales pressure. However, we can say that the price of wheat has also entered a horizontal band in the futures along with the decline in the expectations of increase. However, the increase in production compared to 2012 is still high: the increase amounted to 66, 98 million tons. Assuming that the annual wheat production in Turkey is an average 20 million tons, the effect of the increase in production can be understood better.
Looking at the estimates for next season, we see that the decline in production expectations arises from Europe, North Africa and the Ukraine. Whereas production expectations in Europe decrease, export expectations shows an increase. We can explain this with the proximity to the largest wheat market such as North Africa. According to the same report, year-end stock predictions increased by 14,43 million, and reached 257,34 million tons. Thus, the amount of the increase in wheat stocks in the past eight months has reached 34,46 million tons. The increase in inventories will surely be reflected in the futures markets. The biggest reason for the increase in wheat stocks, however, is evaluated as the decreasing demand in China. The stocks of wheat in China will reach 118 million tons with an increase of 21,7 million for the next season. This figure corresponds to 46 % of the world wheat stockpiles. In this context, it is almost inevitable that China will be an important variable in the wheat market! Despite the fact that China is so important in the market, North Africa, Southeast Asia and the Middle East will continue to be the largest wheat importer. In Southeast Asia and the Middle East a major change is not expected on the side both demand and production. However, it is estimated that there will be a significant decline in production in North Africa. Nevertheless, there will be a decline in stocks, as well. In spite of this, a substantial increase in imports is not expected. European region (Ukraine and Russia included), however, maintains its characteristic of being the largest exporter. European region, China and India will perform nearly half of the world's wheat production.
PERIOD-END STOCKS ARE IN THE HIGHEST LEVEL OVER THE PAST FIVE YEARS
International Grain Commission (IGC) had announced its first estimates for 2016-17 season in the month of April. IGC expects that the wheat production of the world is going to be 717 million tons. There is an increase of about 4 million tons compared to the previous estimates. As for the increase compared to the previous year, however, there is about 17 million-ton decrease in production. Period end stocks increased by 7 million compared to the previous month, and realized in a level of 218 million tons. Despite the serious reduction of production compared to the previous year, it is seen that year-end stockpiles also rose to the highest level of the last five years. In a nutshell, it is understood that the decrease in demand is much more than the decrease in production. The period end stocks, which were 170 million tons in 2012 will reach 218 million tons in 2017. According to this, the rise in wheat stocks will be approximately 48 million tons. In the world wheat market, it may be foreseen that wheat supply will be high. High wheat supply can lead to the upwards movements to remain limited.
TOTAL WHEAT SUPPLY WILL RISE TO 920,2 MILLION TONS
The World Food and Agriculture Organization (FAO) had also announced its estimates for the 2016-17 season in the month of April. According to the previous estimates, the world wheat production is expected to rise 4,2 million and reach 716, 9 million tons. According to FAO, it is stated that the favorable weather conditions in the winter have increased the production expectations in Russia, Ukraine and Europe. Nevertheless, there is a decline in production forecasts in India. According to the FAO estimates, period end stocks will decline to 195, 2 million tons. According to the previous estimates, an increase of 1,5 million tons is expected. Thus, the total wheat supply will rise to 920, 2 million tons.
In conclusion, taking into consideration of the estimates averages of the three Organizations performing global grain markets forecast, world wheat production is expected to be 720,3 million tons in average. It is estimated that there will be a decrease of 650 thousand tons compared to the previous month. Period end stocks, however, will rise to 223,51 million tons. In short, it is expected that there will be an increase of 6,52 million tons compared to the previous month.
In Chicago Mercantile Exchange Market, 455 cent/bushel level for the July futures for wheat price, is seen as a prominent level in the first phase. As long as it is remained over this level, horizontal market will be preserved. This level had been tried for three times before, and it had been recovered again with the purchases received. Due to being tried before, the significance increases even more. In the event that this level is reached, buyer-seller balance should be monitored very closely. In the upward price movements, respectively, 485 cent/bushel level stands out. In the downwards movements, however, 450-455 cent/bushel band comes forward. Nevertheless, FED’s interest rate decisions will continue to impact on the market. Due to the fact that an interest rate decision affects the currencies and liquidity, it has a significant impact on the commodities. As I often underlined before, the remarks of the central banks and follow the new production estimates closely is of great importance in terms of the investors.
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