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Temporary Spring Atmosphere in the Commodity Markets

15 April 20168 min reading
“Particularly the economic slowdown in the developing countries affects the demand adversely. However, positive announcement by FED may create a temporary spring atmosphere in the commodity markets. In this case, the downward trend prevailing in the markets for a long time may leave its place to short-time recovery. New projections in the production volume and dollar trend will determine the extent of recovery. Therefore, following announcements of the central banks and new production estimates closely is of great importance for investors.” Zafer ERGEZEN Futures and Commodity Market Specialist contact@zaferergezen.com Sale pressure that continues for a long time in wheat transactions declined on March which, in turn, created a balanced market. Prices that increased to 630 cent/bushel in the summer period of the year 2015, however the sale trend lead to a decline down to 450 cent/bushel levels. Particularly the high sale expectations served as an important factor in creating sale pressure. It is difficult to say that high production expectations have changed. Nevertheless, we observe an upward trend in the buying patterns due to the cold and arid climate prevailing in the USA. We saw impulse purchases and closure of the short positions due to such concerns. On the other hand, interest decisions of the Central Bank of the USA (FED) continue affecting the commodity markets. We see that the influence of interest decisions on foreign exchange rates has reflections on commodities, too. There was a sale pressure on commodity prices due to the increased dollar value. Particularly in the end of the year 2015, the influence of FED’s decision in increasing the interest rates was felt substantially. However, FED policies softened as a result of the global economic developments on March had reflections on commodity prices and provided grounds for impulse purchases. Currencies of the developing countries went through a recovery process against dollar. We will continue to feel its influence on commodity prices depending on how long this impulse trend will continue. Europe Union’s Service for Monitoring Agricultural Resources (MARS) states that the wheat in Europe is better compared to the previous years as the mild climate allows better cultivation. Russia, one of the important wheat producers, state that the mild climate help wheat production. On the other hand, expectations in Ukraine are not that high due to the arid climate experienced in fall. In addition, Agriculture and Agro-Food Canada (AAFC) announced that the wheat stocks may decline to the lowest levels after 1950s. It is stated that this announcement came after the decline in production volumes. However, the focal point is the fact that projections on production still continue to steer the markets. TURKEY’S DEMAND IS STILL HIGH The long-lasting influence in Turkey still continues. The recovery experienced in wheat prices on March had positive reflections on prices in Turkey. Domestic prices resisting to the decline encountered in the global markets give instant reactions to the global price increases. Therefore, there are still strong expectations towards strong demand. In addition, high production volume of Turkey is expected to continue. Turkish Grain Board (TMO) announced that the wheat production in 2015 may increase to by 18% to 22.5 million tons in 2015. The increase in prices despite the record level production in Turkey is considered as a positive development by both producers and importers. TMO may refrain from announcing wheat buying prices for this year as the prices follow a high trend. The demand is very high because of the high number of refugees coming to Turkey. Refugee policies are not expected to be amended in the near future. Therefore, I believe 2016 prices in Turkey will be strong independent from the international markets. This expectation is underpinned with the lack of substantial changes in the projections on production. EXPECTATIONS ON INCREASE DECLINED TO 9.98 MILLION TONS The projection report published by USA Department of Agriculture (USDA) indicated a decline of 3.45 million tonnes in the production volume compared to the previous month. Thus production volume declined to 732.32 million tons and increase in the production estimates in the last half of the year declined to 9.98 million tons. We observed the effect of the increased production as sale pressure in the future transactions. I insist that he production increase should be 73.22 million tons compared to the year 2012. If we consider that Turkey’s annual wheat production is approximately 20 million tons, we would have a better understanding on the influence of the production increase. Then the sale pressure created on wheat prices independent from the economic developments would be considered normal for this level of increase. Projections for the last month indicate a decline in the production estimates due to Australia and India. The volume of consumption declined in India, therefore reduced production is not expected to have an impact in the wheat market. On the other hand, in Australia, export volume is expected to decline in parallel with the reduced production. The same report shows that the stock estimates declined by 1.28 million tons to 237.59 million tons. Thus the amount of increase in the wheat stocks of the last six-month period declined to 28.36 million tons. India can be shown as the cause of the decline in wheat stocks. Reduced production leads to a decline in stocks despite the reduction in consumption rates. North Africa, South-East Asia and the Middle East will continue to act as the biggest wheat importers. Substantial changes are not expected in the demand and production volumes of these countries. Europe (including Ukraine and Russia) maintains its position as the biggest exporter. Europe will exceed half of the global wheat production together with China and India. China will maintain its position as the biggest wheat consumer. China produces 17.7 of the global wheat production on its own. China holds 39.5 percent of the global wheat stocks. BOTH WHEAT SUPPLY AND STOCKS ARE INCREASING International Grain Council (IGC) increased its production estimates for February. IGC increased its projections on the volume of global wheat production by approximately 1 million tons and expects a volume of 732 million tons in wheat production. This figure indicates the highest production in the last five-year period. Expectations on end of period stocks remained at the same level as the previous year with 213 million tons. We see that the end of period stocks increased to the highest level of the last five-year period with the record level increases in the production. In brief, the demand does not increase at the same rate despite the increased production. End of period stocks will increase to 213 million tons in 2016 compared to the level of 170 million tons in 2012. Accordingly, wheat stocks will increase by approximately 43 million tons. This outlook signals a high trend in the wheat supply in the global wheat market. This upward movement potential may be reflected as impulse purchases. PROJECTIONS SIGNAL THE HIGHEST PRODUCTION VOLUME OF THE LAST 5-YEAR PERIOD World Food and Agriculture Organization (FAO) reduced its production estimates on March. Wheat production is expected to decline by 3.8 million tons to 736.8 million tons compared to the previous projections. Nevertheless, production volume is expected to reach to a peak level for the last five-year period. New projections of India and Iran are shown as the driving forces of the decline in the production forecasts. FAO projections indicate that end of period stocks will declines to 205.1 million tons. In other words, a decline of 5.6 million tons is expected compared to the previous forecasts. Thus, wheat supply will decline to 932.9 million tons. In conclusion, average of the estimations announced by three organizations for the global anticipations in the grain markets indicates a global wheat production of 733.7 million tonnes. End of period stocks will increase to 218.56 million tons. Therefore, production volume is expected to increase to the highest level of the last five-year period. “A TEMPORARY SPRING ATMOSPHERE MAY BE EXPERIENCED IN THE COMMODITY MARKETS” Chicago Commodity Exchange Market suggest 450 cent/bushel wheat price level for purchases payable on May. This price range has always been an important level for both upward and downward trends. Therefore, it is possible to say that this level is important for the market. The level is 480 cent/bushel for upward movements while it is within 445-450 cent/bushel range for the downward movements. If this level declines, the trend of price changes will be dependent on the behaviour of the buyers. High production expectations underpin the projections on the potential sale pressure. Particularly the economic slowdown in the developing countries affects the demand adversely. However, positive announcement by FED may create a temporary spring atmosphere in the commodity markets. In this case, the downward trend prevailing in the markets for a long time may leave its place to short-time recovery. New projections in the production volume and dollar trend will determine the extent of recovery. Therefore, following announcements of the central banks and new production estimates closely is of great importance for investors.”
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