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Lowest level and buyers’ reaction to determine the movement of prices

09 February 20167 min reading
“490-500 cent/bushel level is prominent for March futures wheat prices in Chicago Commodity Exchange. This price level has been significant in upward movements. This level is expected to be prominent in a possible rise. 460-465 cent/bushel level is also prominent in downward movements. The recovery of prices had been realized with purchases starting from this level. In case of a decline to this level, the direction of prices will be determined by whether buyers will show up again or not.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Selling pressure in wheat transactions which has been continuing for months seems to slacken a little in the first month of the year. There has been a light progress with buyers. There was an upward movement for the first time since September. I had mentioned about the reason of this decline many times in my previous articles. Weakening economies of developing countries, strengthening value of dollar and record level production estimates causes selling pressure to be more effective. We have seen that dollar has gained value after the Federal Reserves (FED) increased interest rates in December. The problems are also multiplying in developing countries. Especially the developments about China and economic & political problems of Middle East are followed closely. The balance of wheat price is remaining despite the increase in production estimates. The latest production estimates are still high. Although record production levels are reached, production estimates still move upward. Favorable weather conditions seem to be the main reason for production increase. The news about Russia which is a significant wheat producer and exporter came to the fore in January. It is said that Russia would limit wheat export to meet the domestic demand and balance the rise in prices. Middle East which creates the highest wheat demand in the world may have to find another source if this happens. Moreover, it is also estimated that wheat export of Ukraine would decrease in the new season. It is estimated that wheat production in European Region would be 143.6 million tons. If the estimates become true the lowest production since 2012 will be realized. However weather conditions in USA and Europe which is above normal cause the production estimates to increase. This development may cause production estimates to increase more. DEMANDS INCREASE IN TURKEY I have been mentioning about the strong demand in Turkey for a long time. The prices remain high due to this demand level. We have been following that local prices are moving upward. Local prices which resist the decrease in local markets immediately react to the rise in global prices. This development also supports the fact that demands are strong. High production amount is expected to continue when Turkey’s wheat production estimates considered. Turkish Grain Board (TMO) announced that 2015 wheat production would reach at 22.5 million tons with an increase of 18 percent compared to the previous year. This is a record level for Turkey. The fact that prices increase despite such a high demand shows that demands increased seriously in the last period. TMO has purchased 3.3 million tons of wheat for 2015 so far. Sold wheat amount was 1.9 million tons in the same period. This is the highest selling amount since 2006. In short, local prices are expected to remain high in the new season too because it is not very realistic to expect demand-based factors to change immediately. Therefore I estimate that prices in Turkey would remain high in 2016 as independent from international markets. RISE EXPECTATIONS IN RUSSIA AND PAKISTAN AFFECT GLOBAL PRODUCTION According to the forecast report of US Department of Agriculture (USDA), global wheat production showed an increase of 460 thousand tons compared to the previous month. Thus, production amount increased to 735.39 million tons and the rise in production estimates has reached at 13.43 million tons. There has been selling pressure in futures markets in this period. The most important point is that increase in production reached at 76.67 million tons in 2012. Such a high demand cannot be met without a serious increase. Of course, this causes wheat prices to turn into increased selling pressure. When the fact that Turkey’s annual wheat production is 20 million tons on average considered, the effect of increase in production can be understood clearly. Expected increase in production of Russia and Pakistan plays a significant role in increasing production estimates compared to the previous month. End of stock estimates rose to 232.04 million tons with an increase of 2.18 million tons. Therefore, increase amount of wheat stocks in the last four months has reached at 29.64 million tons. Increase in wheat stocks is caused by USA and Pakistan. Especially in USA, we have seen that demand expectations decreased. China will continue to be the top wheat consumer. China consumes 16 percent of global wheat production on itself. It also has 40 percent of global wheat stocks. North Africa and Middle East countries will continue to be the leading wheat importers. Any significant change is not expected both in production and demands of these countries. The leading wheat producers will be European Region, China and India in the new season. Nearly half of the total wheat production will be realized in these three regions. North Africa, Middle East and South Asia are expected to be the leading wheat importers. END OF STOCKS ARE 213 MILLON TONS International Grains Council (IGC) still keeps its production expectations in January. IGC estimates that global wheat production would be 731 million tons. There has been an increase of 5 million tons compared to the previous estimates. Since production estimates were not announced in December, such an increase can be considered as a correction. This amount points out the highest production of the last five years. End of stocks also increased to 213 million tons with an increase of 5 million tons compared to the previous month. As production reached to record levels it is understood that end of stocks also reached record levels. This shows that increase in production is above the demands. End of stocks which reached at 170 million tons in 2012 will also reach at 213 million tons in 2016. As to this, the increase will be 43 million tons. In this aspect, it is not difficult to estimate that global wheat demand would be high. This remains as the biggest obstacle for prices’ possibility to increase. TOTAL WHEAT SUPPLY IS 937.5 MILLION TONS United Nations Food and Agriculture Organization (FAO) did not announce the new estimates. Global wheat production is expected to be 734.5 million tons compared to the previous estimates. Namely, the expected decrease amount is 1.7 million tons compared to the previous month’s estimates. However these estimates show that the highest production amount of the last 5 years would be reached. The reason of decrease in production estimates is unfavorable weather conditions in Pakistan, Brasilia and Argentina. According to the estimates of FAO, end of stocks will decrease to 206.9 million tons. An increase of 500 thousand is expected compared to the previous estimates. Thus the total wheat supply will decrease to 937.5 million tons. As a result, when the average estimates of the three institutions which make global estimates for grain markets considered, global wheat production is expected to be 733.63 million tons. According to the previous month’s estimates, there has only been an increase of 1.82 million tons. End of stocks will also increase to 217.31 million tons. Namely, it is estimated that stocks would increase 2.38 million tons compared to the previous month. HIGHEST LEVEL IS 490-500; LOWEST LEVEL IS 460-465 CENT/BUSHEL 490-500 cent/bushel level is prominent for March futures wheat prices in Chicago Commodity Exchange. This price band has been significant in upward movements. This level is expected to be prominent in a possible rise. 460-465 cent/bushel band is also prominent in downward movements. The recovery of prices had been realized with purchases starting from this level. In case of a decline to this level, the direction of prices will be determined by whether buyers will appear again or not. Strengthening value of dollar along with high production estimates create the idea that selling pressure would be more effective. Especially weakening economies of developing countries affect demands negatively. Production estimates are still high. In this case, it does not seem right to expect an upward and permanent rise in prices if production estimates are not revised downwardly or wheat demand does not increase significantly.
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