For the period from 12 to 20 April, the agricultural commodities futures market demonstrated something resembling a price rally. Wheat was no exception, though it demonstrated rapid pullback. In my opinion, the analysis of key fundamental factors which have been a formal justification for the increase in the wheat price does not allow to expect the further development of this rally.
The United States
According to the first official USDA assessment, the wheat planted area in the United States in 2016/2017 totaled 49.6 million acres. (-10.6% y/y). This is the lowest rate at least over the past 20 years. The final size of planted area is lower than the March forecast of 0.5 million acres on average. It means that the projections are worth a start from 49 million digits. According to statistics, 15% of the area remain unharvested over the last ten years, i.e. the harvested area in 2016/2017 will be approximately 42 million acres.
Source of data: USDA
The first condition assessments of winter wheat crops since the vegetation resumption in the United States show much better results than last year.
Source of data: USDA
The proportion of crops in good and excellent condition, on the third week of April is 57%, compared to 42% in the same period a year earlier and 34% in 2014. I believe it is possible to predict the yield of wheat in the United States at the level of 46 bushels per acre, and the total production of wheat at the level of 1932 million bushels. This result is 120 million bushels lower than in 2015/2016. However, if we consider that the beginning wheat stocks in the United States in 2016/2017 are 224 million bushels higher than in 2015/2016, it can be concluded that the likely production decrease is fully compensated by the carryover. Thus, it is too early to talk about the deficits of wheat in the United States due to the reduction of the planted areas. Although, the stocks are unlikely to grow.
India is the second largest producer and consumer of wheat in the world. The Indian Government is considering abolishing the duties on wheat imports from July 2016. Now the rate of import tax is 25%. The reason for such a step was the expectations of production decrease due to the adverse weather.
Some experts expect the 2016/2017 production to be at the level of 82 million tons against 86.5 million tons in 2015/2016, while imports are projected at 4 million tons against 0.5 million tons in 2015/2016.
The last time India bought relatively large amounts of wheat was in 2006/2007. The import then amounted to 6.7 million tons and the beginning stocks - to 2 million tons. The beginning stocks in 2016/2017 in India will amount to 1319 million tons. However, even after taking into account the possible reductions of production and the unchanged consumption level (although India has been reducing the consumption of wheat over the past two years), the ending stocks will hardly fall below 9 million tons. This figure is not much below the average level over the past 10 years.
I believe that the accumulated stocks of wheat in India will help to survive a possible lean year, importing not more than 2 million tons. This is unlikely to have a significant impact on world wheat balance.
According to a preliminary forecast of the International Grains Council, the wheat production in 2016/2017 will be 713 million tons, i.e. by 21 million tons lower than in 2015/2016. However, due to record-high carryover and the consumption reduced by 4 million tons y/y due to the global economic slowdown, the ending stocks in 2016/2017 are projected at the level of 211 million tons, which is only 3 million tons below the absolute record established in 2015/2016.
Considering the ICG forecast of the corn production growth by 21 million tons and the ending stocks increase by 2 million tons, one can conclude that the global grain balance (wheat + corn) practically will not change.
It is worth noting that funds mainly went back to purchases of agricultural commodities. This applies to soybean and corn, but not to wheat. As of April 19, the funds still hold a fairly large net short position on wheat and there are no signs of its planned cuts yet. I find it hard to believe a significant rally is possible without the support of funds.
Source: Saxo Group
There is still a lot of grain in the world and almost no real reasons to believe that its amount will substantially reduce in 2016/2017. With the support of the adjacent corn market, the wheat futures are likely to climb above $5 a bushel amid "a spring of uncertainty", but are unlikely to go higher in the near future.
Unless otherwise noted, all charts included are my own.
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