The wheat market has focused on the demand
08 January 20148 min reading
The increasing estimations about wheat prices and the news about that monetary expansion would decrease caused the value loss of wheat prices in December. Although the demand from North Africa and China is strong, it is seen that selling pressure has been increased. Especially the downward of 650 cent/bushel level caused that the acceleration of sales. Wheat price nearly has lost 10% value. The value loss that has been experienced since May has reached 20%.
When we look at the whole year, May was quite critical for wheat price: The news about that U.S. Central Bank Chairman Bernanke would decrease the monetary expansion and the production estimations’ pointing a high yield amount caused the wheat to enter into a falling trend. Providing support over 650 cent/bushel level in the period from August till November, the wheat price has been broken downward with the increasing sales in December. Shortly, the downward trend in wheat transactions has re-started. Within this frame, the predictions on production will continue to play an active role in the coming months.
U.S. Department of Agriculture has announced that the wheat production for 2013/14 season will be higher 55,25 million tons compared to the previous year. Thus the total wheat production is estimated to reach 711,42 million tons. As a result of this increase in production, total wheat stocks will be 182,78 million tons. To sum up, there is an increase expectation both on production side and end-period stocks. While the world wheat production estimation increased 5,04 million tons compared to the previous month, the increase in end-period stocks reached 4,3 million tons. A change on monthly basis like that is quite remarkable. We felt its effect clearly in terms of sales in futures trading: support points were broken downward. Almost all of the increase in production comes from Canada.
It is estimated that wheat yield in Canada will reach to 37,5 million tons with a 4,3 million-ton increase. Canada’s wheat production estimation was also increased 1,7 million tons in the previous month. In other words; the additional production amount that can almost meet the whole demand of Brazil as one of the important wheat importers has been reached by Canada.
Australia becomes prominent as the country with the expectation of production increase. The wheat production in Australia is expected to reach 26,5 million tons by increasing 1 million tons compared to the previous month. While the wheat production amount in China does not change with 121 million tons, the total wheat consumption will be 125,5 million tons.
The countries in the Black Sea Region will realize 14,6% of world wheat production. But their share from world trade will increase. Their share in world wheat export will increase over 22%. China continues to be the largest producer and consumer in the wheat market. While 17% of total wheat production is supplied by China, its consumption is realized as 31% of the consumption. Shortly China consumes wheat as much as the amount in the whole European Region by itself.
International Grains Council (IGC) expects world wheat production to reach 698 million tons with 2 million-ton increase compared to the previous month. However; the increase expectation with the same amount in also wheat consumption causes a balance in the end-period stocks. In other words; IGC expects a more balanced market than the estimations of U.S. Department of Agriculture. In spite of that, IGC’s wheat index decreased 3% on monthly basis. The reason of the increase in the production is shown as the increasing production estimations of China and USA.
According to IGC data; wheat trade is expected to be 142 million tons by maintaining the same level compared to the previous month. The increase in the demand prevents the end-period stocks to increase. Wheat stocks are still below the 2011/12 record stock level despite the increase. The weakness in wheat prices is attributed to the increase of production estimates due to the U.S. export figures and favorable weather conditions.
IGC also announced its five-year expectations in December. Supply and demand are expected to follow a balanced course in the next five-year period. The demand is expected to increase especially with the food need from Asia and Africa. The change in the end-period stocks is stated as low. It is foreseen that world wheat production will be 737 million tons in 2018/19 season, while the wheat consumption will reach 738 million tons. World wheat trade will be 148 million tons. According to this data; a quite balanced wheat market is expected in the next five years.
The United Nations Food and Agriculture Organization (FAO) increased its world wheat production estimation on its monthly report to 710,8 million tons by increasing it 2,3 million tons compared to the previous month. Thus the increase in the last two months was 6,2 million tons. The increase in world wheat production reached 7,8% compared to the previous month.
The production increase expectation in Canada and European Region becomes prominent. It is understood that the production estimations in South America were decreased due to the unfavorable weather conditions.
It is stated that high production amounts of wheat will be reached in many regions and where wheat is more productive than other agricultural products. While an increase is expected in USA compared to the previous season, 4 per cent-increase is also expected in Europe compared to the previous year despite the unfavorable weather conditions. A little decrease is expected in the production amounts of Russia and Ukraine. Thus; while the prices in the Black Sea Region increase, the difference of price margin between Black Sea wheat and European wheat declined in December.
Even European wheat comes to the forefront in the wheat purchases of North Africa. For that reason, it is known that there is an increase in the wheat prices in France and there are delays in the loadings due to the density in the ports. While it is foreseen that high wheat production amounts will be reached in Egypt and Morocco, a rapid decrease in Tunis is projected. World wheat stocks are expected to be 171,8 million tons.
Consequently; when the estimation average of the three organizations that make global estimations in grain markets is taken into account; world wheat production is estimated to be 706,74 million tons averagely. This figure means a 3,11 million-ton increase compared to the previous month. The increase in the last two months has reached 4,44 million tons. Total wheat yield average was realized as 656,7 million tons in the last year.
In other words, the increase on yearly basis is 7,6%. When the data of this month is taken as basis; it is seen that U.S. Department of Agriculture pays attention to the increase especially in Canada and Australia. The estimations of IGC and FAO followed a more balanced course. However; the common point of the three organizations is the expectation of increase in the production amounts. Thus, it is not expected much change in the future price estimations. A striking contrast is that IGC and FAO do not expect much change in end-period stocks.
March futures wheat price in Chicago Mercantile Exchange declined below 650 cent/bushel level by decreasing with the high production estimations. Being below that level caused a new downward trend. Especially high production estimations are effective on that. Response purchases can be seen according to the production estimations to be announced in January.
However; when the reports announced in December are reviewed, there are positive expectations for the future in general. In case of weather conditions that may affect the wheat yield and loss of product, it is expected that the production estimations in the next months will be high.
The increase in transaction volume during the sales of futures transactions is seen as a negative picture. The sales in wheat transactions accelerated with the announcement that U.S. Central Bank will decrease monetary expansion. Some funds that already closed their positions due to the expectation of decrease in liquidity are effective now. Furthermore, the investors that wouldn’t like take a risk before the new year turned to sales.
A balanced market can be seen with the opening of the new positions in January. However; it shouldn’t be forgotten that it is in a downward trend. We can see response purchases in the periods when the estimation reports are announced. As it is not expected much change on the production side, the market will be focused on the demand side. Especially it can be expected that the purchases to be made from North Africa and the wheat export figures of USA become prominent.
Weather conditions gain importance on China’s side. When we review in general; a market that is more balanced and focused on the demand side waits for us. The funds and investors that will open positions in the first weeks of the new year may cause an increase in the wheat prices. However; production and demand-driven developments will be followed for a permanent rise.
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