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Purchases to be made without the confirmation of base prices are risky

11 October 20137 min reading
The price of December wheat futures experienced an upward trend due to the increasing demand especially from China and Egypt. Despite the expectations for high production, wheat prices experienced a balanced process. Estimations of U.S. Department of Agriculture (USDA) and International Grains Council increased compared to the previous month. U.S. Department of Agriculture increased its production estimation for 2013/14 season to 3,51 million tons compared to the previous month. Total wheat production is expected to reach 708,89 million tons. Expectations of higher yields in Canada and European Region come to the forefront in this production increase. While wheat yield in Canada reaches to 31,5 million tons, total wheat production in European Region is expected to be 142,9 million tons. End of period stocks will reach to 176,28 million tons with 3,29 million-ton increase. The increase in stocks is due to the stock increase in Canada and North Africa. In short; while there is increase in production, world wheat consumption is expected to experience 1,17 million-ton decrease. We see that the wheat consumption in Australia decreased according to the previous estimations. While China realizes 17 % world wheat production, has 32 % of the end of period stocks. China is the largest wheat producer with 121 million-ton production. Despite that, it is estimated that China’s share from the world wheat trade will be 3,5 %. On the other hand, as the world largest wheat exporter USA’s share reaches to 12 %. USA is expected to realize 29,94 million-ton wheat export that is more than the total of European Region. Shortly; when we examine the estimations of U.S. Department of Agriculture, it is seen that there is not much change in the demand despite the increasing wheat yield. Thus it seems debatable that how long the increasing wheat demand will be permanent in the market. International Grains Council (IGC) expects world wheat consumption to reach 691 million tons with 4 million-ton increase compared to the previous month. Increase expectation is seem to be in parallel with the data of U.S. Department of Agriculture within this frame. The expectations in Canada, Europe, Kazakhstan and Ukraine have impact on this increase prediction. Different from USDA data; IGC expects nearly 2 million-ton increase in consumption. Likewise due to the expected increase in wheat trade, end of period stocks are seem to be on the same level. Shortly; while world yield increases, the increase in consumption and wheat trade at the same level will not change overall picture according to IGC. End of period stocks will be realized as 176 million tons. Increasing trade demand from Brazil, China and Iran is seen as important factor that prevents the change of the balance. Wheat index of IGC increased 1 % on monthly basis together with these data. We can see a similar picture at the beginning of October. Food and Agriculture Organization of the United Nations (FAO) increased its world wheat production estimation to 709,8 million tons with 5,7 million-ton increase compared to the previous month in its monthly published report. It is foreseen that wheat production especially in Australia, European Region, Argentina and Canada will provide additional contribution to world wheat production. FAO estimates that world wheat stocks will be realized as 170,1 million tons. FAO is seen as the institution that presents the lowest end of period stock estimations. Estimating that world wheat trade will be 139,5 million tons, FAO differs from U.S. Department of Agriculture in estimations. World stock usage ratio is estimated to reach 24 % by increasing compared to previous year. This number was realized as 28,6 % in 2009. As a result, total wheat production is expected to increase 50 million tons compared to previous year. This amount equals to 7% of world total wheat production and it means additional new production as much as almost USA’s wheat production. To conclude, when the estimation average of the three institutions that make global estimations for grain markets is taken into account, world wheat production is expected to be 703,23 million tons averagely. It was 656,7 million tons last year. End of period stock average will be 174,09 million tons with an increase of 423 thousand tons compared to last year. The biggest difference compared to previous month emerges at this point. Besides the high yield, it is seen that there is increase expectations is end of period stocks. Last month, decrease was foreseen for the average. When we look at the developments on the demand within this frame, we see that Egypt as the world’s largest wheat importer continues to wheat purchase auctions after the coup. New Administration in Egypt announced before that wheat stocks will be increased to 6,5 million tons. Import amount in September exceeded 1 million tons. Purchases are realized from Ukraine, Romania and Russia as before. When this article was being written, total wheat purchase by Egypt increase to 2,15 million tons in the new season. Total paid amount is realized as 570 million dollars excluding shipping. When the targeted purchase amount is taken into account, Egypt will continue to be effective in wheat market in the next period. Recently, it has been announced that Russia and Egypt agreed on long-term wheat supply. Thus Russia is expected to get the largest share in the nearly 4 million-ton import to be expected done by Egypt. This means 1 billion-dollar trade volume! According to data of Russian Statistics Agency; the new season grain exports increased by 20 % compared to the previous year and reached 6.4 million tons. Wheat export was realized as 3,04 million tons in August. Institute for Agricultural Market Studies (IKAR) estimates that grain production in 2013 will be 89,7 million tons. Especially the purchases from China and Egypt make the producers in Black Sea Region happy. Price advantage of this region compared to European wheat is seen as the element that increases the demand for this region’s wheat. However; the competition in Black Sea Region is heating up. An announcement was made in September about that Russia’s wheat export may decrease due to increasing competition. Deputy Minister of Agriculture of Russia Alexander Petrikov states that increasing competition due to Ukraine and Kazakhstan may cause excess production within the country. On the other hand; it is put forward that Ukraine who has advantages due to low prices can reach to 29 million-ton wheat export and thus can be among top three countries in the world. One of the trending topics in September is the decision of Federal Reserve Bank of US (FED) about monetary expansion. FED’s explanation surprisingly that monetary expansion is not reduced now was met with excitement in the market. Its effect on agricultural commodities reflected on the market as limited purchase. However; the explanation of St. Louis FED Chairman James Bullard on that monetary expansion would start in October has the opposite effect. New explanations to be made about monetary expansion in October may cause short-term fluctuations in wheat transactions. But there is the need of avoiding sudden and panic transactions in the market. Without hearing the news that will change long-term price trend, a change in the market should not be expected. December futures wheat price at Chicago Mercantile Exchange generated support over 640 cent/bushel level in September. We see that the demand especially from Egypt and China helped to stabilize prices. In order to support formation of base, the prices should stay at 660 cent/bushel level. It should be remembered that world wheat production amount has reached to the highest level of the last 20 years! Thus the purchases without the confirmation of base formation can be evaluated as risky. When this article was being written, 680 cent/bushel level was exceeded. The trend line increasing for 4 years is at 635 cent/bushel level. But wheat prices have obtained strong support before reaching this level. The increase started at the end of the month gives signals for base formation. 710-640 cent/bushel level can be the reference point for October. Last month, I mentioned that increasing wheat demand from China, Egypt and Japan would be effective on determining which direction to take for the market. The increase in this demand helped stabilization of the market in September. It is foreseen that wheat prices in October will fluctuate between 710-640 cent/bushel levels. Egypt is estimated to purchase 4 more million tons wheat. If the purchases from China and Egypt continue, this situation can support the prices. However it is useful to follow new (record) production estimations.
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