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The tension between Ukraine and Russia hit the wheat prices

08 April 20148 min reading
“We can see that sales would increase at 720 cent/bushel level in April. It is possible to see balancing and improving efforts after a rapid increase. However, we can see that the price movements would be affected depending on the weather conditions. Besides that, the tension between Ukraine and Russia will be variable on the prices.” The developments about Ukraine was effective on the wheat market in March. The concern that the increasing tension between Ukraine and Russia would affect the wheat trade increased. Ukraine and Russia realize approximately 10% of the world wheat production and 17% of the world wheat export. Ukraine is known as an important wheat market especially for North Africa and China. Thus, the increase of the tension in the region causes an increase in the risk premium on the wheat prices. If the tension continues, it is highly possible to have delays in the deliveries. It is understood that weather conditions will be important for wheat yield. The concerns on the wheat market started to increase after the period without rainfall in many countries especially like U.S. Due to the insufficient rainfall, it is stated that production and quality can be affected from this situation. However, it is hard to say that these concern are reflected on the production estimations. USDA HAS INCREASED ITS PRODUCTION FORECAST U.S. Department of Agriculture announced that the wheat production for 2013/14 season will be 56,3 million tons more than the previous year. Thus, total wheat production is estimated to reach 712,72 million tons. Total wheat stocks will be 183,81 million tons as a result of the increase in the production. Shortly, we see that the production forecast increased compared to the previous month. It is seen that the drought concerns have not affected the production forecasts. The production increase in Australia and India increases the world wheat yield. The rainfall in India and the yield increase in Australia are expected to be resulted in increase of the production. China will be the largest wheat producer of the world. Approximately 17% of the world wheat production is realized by this country. Despite this fact, it is a net wheat importer as its wheat consumption is more than 3,8 million tons. The data that attracts significant attention is that China has one third of the world wheat stocks. In other words, wheat is a really strategic product and it meets a significant part of the food need. This causes China to be an important player in the wheat market. Besides the increase in the world wheat production, there is also an increase in the world wheat export. It is already seen that wheat demand has been strengthened for a while. This situation has been reflected on the forecasts of U.S. Department of Agriculture. It is estimated that wheat consumption in 2013/14 season will reach 839,77 million tons. There is an increase of nearly 23, 84 million tons compared to the previous year. The wheat export in Europe is expected to increase after high wheat yield. Russia is projected to realize approximately 1 million tons more export despite the increasing tension in the region. When we look at the end period stocks, there is not a significant change. The increase in the production balances with the demand increase. Thus, instead of production projections; weather conditions and the tension between Ukraine-Russia become prominent. We saw its effect during March. DEMAND WILL CONTINUE TO BE STRONG IN THE NEW SEASON International Grains Council (IGC) expects world wheat production to reach 708 million tons (1 million tons more than the previous projection). IGC’s wheat price index showed 2% increase on monthly basis. The production is estimated to decrease in 2014/15 season compared to the previous year despite the increases in the wheat cultivation areas. At this point, it draws attention that overproduction occurred in the previous season. IGC has an expectation that the demand will be strong in the new season. Despite the high stocks at the beginning of the season, it is noted that the consumption will meet the supply. Besides, world wheat trade will decrease compared to the previous season together with the increase of the wheat quality in China. Wheat consumption in 2013/14 season will be 691 million tons. World wheat trade is expected to decrease 1 million tons. A significant increase is seen in the wheat export from Ukraine and Europe. However, the wheat trade in the Russian and Ukrainian regions is expected to decrease after the tension between those countries. A revise in this direction can be seen in the data to be published in this month. Despite the increase in the demand, end period stocks are projected to reach 386 million tons. This amount points a significant increase compared to the previous season. Thus, the wheat stocks are projected to reach an amount that is higher than the record amount in 2011/12 season. IGC’s price index for this period is 251. Last year’s wheat index was at 263 level. Wheat index on annual basis seems to decrease. FAO DECREASED ITS WHEAT PRODUCTION ESTIMATION The United Nations Food and Agriculture Organization (FAO) decreased its world wheat production estimation to 704 million tons by decreasing 10,2 million tons on its monthly report. While the wheat production in Canada is projected to decrease 20% compared to the previous year, a decrease of over 10% is seen in Turkey and Ukraine. End period stocks in 2013/14 season are estimated to reach 179,3 million tons. In other words, an increase of 20 million tons is projected compared to the previous season. Despite that, the stocks are expected to be below the stocks in 2011 and 2012. A decrease is seen in Canada after the high yield in the last year. Wheat cultivation lands are projected to increase 3% in Europe. The upward trend in the wheat production in China will continue. While wheat cultivation lands increase in Russia, a decrease is expected in Ukraine. If you take Crimea from Ukraine and give to Russia, a result like that should be considered as normal. HIGH YIELD INCREASES THE PRESSURE ON THE PRICE Consequently; when the estimation averages of the three institutions that make global estimations in the grain markets are taken into consideration, world wheat production is expected to be averagely 708,24 million tons. This figure points a decrease of approximately 2,79 million tons compared to the estimations in the previous month. Last year’s average was realized as 656,7 million tons. 51,54 million ton-increase is projected compared to the previous year. In other words the increase on the annual basis will be 7,84%. When the data of this month is taken into consideration, it is seen that the estimations are more pessimistic compared to the previous month. A decrease to the normal levels is estimated again after the high yield in the last year. Besides that, we can say that weather conditions have started to be effective in the estimations. I think that its effect will be seen more clearly in the estimations to be announced in this month. However, there is still a higher production compared to the previous year. High yield is estimated to create pressure on the prices and limit the excessive increases. May futures wheat price reached over 655 cent/bushel level by increasing with the tension between Ukraine and Russia and dry weather in Chicago Mercantile Exchange. We saw that purchases were effective during last month and the production concerns in U.S. and Crimea issue were decisive. Production estimations were not much effective on the prices. The increase starting in February continued rapidly in March. Thus, the increase in the last two months reached approximately to 28,5%. The closing of the short positions and the increase of the electronic loss-cut operations increased dimension of the increase. THE DETERMINANT OF THE APRIL WILL BE WEATHER CONDITIONS We can see that sales would increase at 720 cent/bushel level in April. It is possible to see balancing and improving efforts after a rapid increase. However, we can see that the prices movements would be affected depending on the weather conditions. Besides that, the tension between Ukraine and Russia will be variable on the prices. The fact that the problem is not only between Ukraine and Russia but also it has become a global crisis poses a risk to the wheat prices. If the sanctions to be applied to Russia are directed towards trade products, we can see that wheat price is affected mostly. Shortly, we will continue to talk about Ukraine and weather conditions in April. Not much change is expected in the production estimations to be made. However; if the expectations of a slowdown in the trade of the Black Sea Region affect the estimations, some changes can occur in the wheat prices. Consequently, more profit sales and efforts of forming a balance are expected to be seen in April. We may see a fluctuating but a horizontal market where sharp sales occur from time to time.
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