Wheat in focus as fierce competition, oversupply weigh on prices

Elsayed Solyman
8 Min Read

Analysts expect wheat prices to come under pressure in 2018, hit by fierce competition among top exporters and oversupply with the US Department of Agriculture’s latest USDA increasing its estimate for 2017-18 global wheat production to 755m metric tonnes—a new record high.

According to the report, 2018 would be the fifth consecutive year of increased global wheat production.

Wheat’s future prices for March delivery is hovering around their lowest level in two years, standing at $428 per tonne.

Analysts polled by Daily News Egypt said that the prices of wheat are expected to extend their downward trajectory in 2018 amid ample supplies and fierce competition among major producers, including Russia, Canada, Ukraine, France, and the United States.

A recent report issued by USDA said that wheat projected 2017/18 US ending stocks are raised this month by 25m bushels on reduced exports.

This reduction is primarily attributed to heightened Canadian competition expected from increased exportable supplies.

Canada and the United States compete in several of the same markets in Latin America and East Asia.

Global 2017/18 wheat supplies are increased, primarily on higher production forecasts for Canada and the European Union, more than offsetting production declines in Brazil, South Africa, and Yemen.

Canadian wheat production has risen 3.0 million tonnes to 30.0 million, largely on increased yields in the Prairie Provinces as reported in Statistics Canada’s Production of Principal Field Crops report, released on 6 December.

Meanwhile, the report said that EU wheat production is raised 1.0 million tonnes to 152.5 million, mainly on higher production in Romania, Poland, Latvia, and Bulgaria.

World 2017/18 trade is greater exports from Canada, Russia, and Ukraine, more than offset reduced US exports.

Projected imports are increased for Indonesia, China, and Brazil. Indonesia’s imports are raised 1.0 million tonnes to 11.5 million, primarily on higher expected feed wheat usage.

Total world consumption is projected 2.1 million tonnes higher, primarily on greater usage from Indonesia, Canada, and the EU.

Projected global ending stocks are 0.9m tonnes higher at 268.4m, which is a new record.

Bearish market outlook looms

With wheat global supply on the rise, a bearish market outlook is expected to hit prices in the mid-term, analysts said.

“We don’t expect wheat prices to improve too much in 2018, but there will be short-term rallies that will certainly prove profitable due to bad weather in the United States particularly,” said Garrett Baldwin, a senior commodity analyst at Farmlead Consultancy.

“This means selling into strength and making incremental sales as the price goes up,” he added.

Prices of the wheat future received a boost this week, rising to a two-week high level on bad weather conditions in the United States.

“Ever since the bumper crop of 2013, the market has slowly been working its way through stocks of higher quality wheat coming out of Canada. More specifically, Canada ended 2013/14 with almost 8.7m tonnes of wheat (or at least that wheat which was not durum). The stocks-to-use ratio that year in Canada was 33%,” Baldwin added.

The harvested area of US spring wheat was much lower than 2016. With 10.16m acres of US spring wheat combined, that was 16% below the five-year average and nearly 10% below last year’s total, according to a recent report.

From a production standpoint in the US, drier conditions in major spring wheat production areas meant lower yields.

More specifically, American spring wheat yields dropped 13% year-over-year to 41 bushels in 2017/18.

Russia, the fierce competitor, is another drag

The world’s top shipper is proving a fierce competitor as this year’s bumper crop drives even more exports.

As it makes inroads into the European Union’s traditional markets, Russia’s selling point is simple: good quality wheat at prices that many rivals just can’t beat.

“Everyone is watching Russia right now,” said Miroslaw Marciniak, a director at InfoGrain, a Warsaw-based adviser.

“In the past few years, Russia has been more and more aggressively fighting for new markets. The EU right now has one big problem—what to do with its grains surplus.”

In a world overflowing with grains, low-cost emerging markets from Russia to Latin America are challenging well-established suppliers such as the US and the EU. Russia, once home to a failing Soviet farm industry dependent on imports, has in recent years emerged as a wheat superpower.

That helped depress global wheat prices, with benchmark futures in Chicago down 11% in the past two years.

Russia surpassed the EU as the No. 2 exporter last season and is forecast to take the top spot in 2017-18.

Its booming agricultural output has helped expand its presence in markets around the world from Asia to Africa.

Russia’s export gains are bad news for the EU, and especially its top producer, France, which is trying to regain its market position following an abysmal harvest last year.

Russia took advantage of France’s stumble to gain a foothold with some of its most faithful customers.

Nations including Cameroon, Ivory Coast, Mauritania, and Senegal all expanded purchases of Russian wheat last season and are coming back for more this year, according to consultant Strategie Grains.

“Last year opened the door to Russian wheat, and now we don’t know when this door will close,” said a recent research note by Strategie Grains in France.

Russia is also dominating imports by top wheat buyer Egypt, accounting for three-quarters of the country’s purchases so far this season.

The EU, represented by Romania and France, sold a combined 18%, according to official data.

Cutting the crop by half still not enough to boost prices

A recent report issued by Agriweb, a London-based consultancy group, said that cutting the crop by half isn’t enough to support prices at least in the mid-term, as higher production from top producers will weigh on prices in years to come.

“Demand could decline even more next year. Italy, Canada’s second-biggest buyer of wheat durum last season, is planning to introduce rules in early 2018 that may limit imports,” the report noted.

Wheat stocks will keep pressure on the market. Given that the 2017/18 marketing year world wheat harvest is nearly complete, and the 2017/18 marketing year wheat supply is known, changes in stocks won’t stampede the market.

A sign that wheat stocks are not an issue is that Australia is projected to produce 42% less wheat in 2017 than was harvested in 2016. Australia’s lower production had little impact on prices.

Share This Article
Leave a comment