The increase in the production increases the selling pressure in the wheat market

04 February 20148 min reading
Zafer ERGEZEN Production continues to be the most important factor for the wheat market. I have been mentioning the same thing for months but the market sees anything that wants to see. Not being obstinate with the market, noticing the price trend and making healthy decisions are quite important. Wheat has made a bad start in 2014. The data including that world wheat crop would be high reflected on the futures as sales. But there were recovery signals on the demand side. There were increases in the demand especially from North Africa. Despite this, it is seen that the market is focused on the production side. Actually, it would be more accurate to say that high production estimations are used as an excuse for sales. The fact that U.S. Central Bank started to decrease monetary expansion was negative for commodities. It is estimated that there is capital outflow in the commodity markets due to the decrease in liquidity and then the increase in bond yields. As a result, a market dominated by the selling pressure is formed. Besides, the direction of wheat production to record levels makes it easy for finding excuses for sales. 600 cent/bushel level decreased in March futures wheat transactions. We saw too harsh sales when the reference point I gave last month decreased. The breaking of 600 cent/bushel level had the same effect. A little recovery and support effort was seen after U.S. Department of Agriculture announced its monthly estimation report. As a result, the decrease has exceeded 20% since October. It is not possible to say that a reaction was given during this decline. As the markets focus on the production, the market will focus on the estimation data of USDA and the production in the market in the coming period. One of the best examples of this is the wheat prices in Turkey. While the wheat prices in futures lose value rapidly, the wheat prices in Turkey continue to be strong. While the global prices decrease over 20% the drought concerns in Turkey caused the prices to be high. Lack of rainfall in sufficient quantity increases the concern on wheat production. It is stated that the wheat seeds are dried due to the lack of rainfall and snow in the winter months. The rainfall may be below 30%. When this point of view is taken, it is understood why the concerns on drought raised. Turkey’s wheat crop can be under the expectations in this case. We already see the reflection of this situation on the wheat prices. Snow and rain have become important for Turkey. However, it is not known whether the rain that will fall after this date would save how much of the planted wheat. As a result, it becomes very suitable for drought concerns. It would be very natural for the concerns to be reflected on local prices. Together with that, the decrease in the wheat crop would result in more wheat import. Thus, it is important to make regulations in advance. If the authorities were late for the import regulations, the increase in the local wheat prices would be rapid. Thus, the access of the local wheat and flour companies to the global prices is very important. They can get rid of the effect of high wheat prices in the local market with the futures and options in the international markets. The companies who can achieve that, not only get rid of the price risk but also become more competitive in the related market. Due to the drought concerns in Turkey, the estimation institutions are expected to state this change in their new reports. However, the point that should be taken into consideration is that local wheat prices cannot be high if sufficient wheat import is done on time. Production continues to be the most important factor for the wheat market. I have been mentioning the same thing for months but the market sees anything that wants to see. Not being obstinate with the market, noticing the price trend and making healthy decisions are quite important. U.S. Department of Agriculture has proved that the concerns are justified. U.S. Department of Agriculture increased its wheat production projection 5,32 million tons for 2013/14 season. According to that the production increase is 56,21 million tons compared to the previous year. This is a significant increase. For instance; a production increase that is more than the wheat amount produced by US in 2012 is being realized in 2013/14 season. In other words, it means a production increase way more than the wheat amount produced by Turkey in two years. It is not expected for futures to remain unresponsive to a production increase like that. Despite the demand increase, significant increase in the production is a good reason for the sales. According to the monthly estimation report of USDA; total wheat production is estimated to reach 712,66 million tons. As a result of this increase in the production, total wheat stocks will be 185,4 million tons. Shortly, there is an increase of 2,62 million tons in the stocks. As the increase expectation in the production is not met by the demand, it reflects on the end period stocks. The demand side I have been mentioning for a while is not reflected on the estimations of USDA. There is even a decrease of 3,53 million tons on the demand side. Despite that; after the announcement of USDA report, the support efforts of wheat price are remarkable. A great part of the increase in the production is provided by China and Russia. While the wheat production in Russia increases 600 thousand tons, one million-ton increase is expected in China. The rest with one million tons is shared with other countries. While total wheat production amount increased to 122 million tons in China, total wheat consumption did not change and remained at 150,5 million tons level. As a result of that, the wheat stocks in China are expected to be realized one million more in the end period. Providing 17% of world wheat production, China realizes 18% of the wheat consumption by itself. Another important note for China is that it has 31,2% of world wheat stocks. The decrease on the demand side is felt mostly by US. The decrease of the demand side in US despite the economic recovery is seen as one of the effect of FED-sourced monetary expansion. A little capital from commodity markets is considered to be effective on this process. European Union countries are one of the regions having decrease in demand. There is one million less demand in those countries. To sum up, U.S. and European Union countries cause the decrease of the wheat demand in the world. December futures wheat price in Chicago Mercantile Exchange declined 600 cent/bushel level decreasing with high production estimations. There is not any data that can change the expectations of wheat prices in short term. Being below the level of 600-640 cent/bushel level, the prices make the technical appearance more negative. Speaking positively for wheat is impossible without the increase of the prices above this level. Besides, the high production projections in the estimation reports and the insufficient revival in the demand cause selling pressure. Wheat price lost value over 20% compared to the highest value in October. A little amount of sales in a short period shows that the recovery would not be easy. The increase in especially short positions is important. A healthy increase cannot be achieved without closing of these positions. Following the concentration on the short positions during increases can be useful for the decisions to be made. We can see the efforts of forming new supports in February. However; wheat is seen in a strong decrease trend. Thus, the news will be used mainly as an excuse for sales. Especially the production and demand estimations will be followed closely. The announcements of Food and Agriculture Organization (FAO) and the International Grains Council (IGC) in February can be effective on the markets. It would be useful to wait for the formation of the base before taking position in wheat futures. Attention should be given while making purchases as there is a decreasing trend. Together with that, it would be taken into consideration that increases provide sales opportunity. Long positions can be considered again when the wheat price gives serious signals for the formation of a base. But, the falling trend should be ended firstly to achieve that. It should be taken into consideration that risks also increase in a downward market. Although we draw a negative picture for wheat prices in this month, it shouldn’t be forgotten that there has been a value loss over 20% since October. Thus, there can be a reaction movement towards 600-640 cent/bushel level again in February. I can define that as a correction of the rapid decline. The important thing is the chance of the wheat prices to increase over these levels. Then we can talk about change in falling trend. In this case, a rapid recovery should be seen on production and demand estimations. However, it is not possible in short term.
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