4 Years Of The Bear Wheat Market Are Over

| About: Teucrium Wheat (WEAT)

Summary

"The best remedy against low wheat price is low wheat price".

The record global wheat stocks are nothing more than a formality.

The global planted area under wheat is unlikely to increase in the near future.

The world demand for wheat is steadily growing.

Since July 2013, the wheat futures price has been gradually falling, losing approximately one and a half dollar a year. But as you know, the best remedy against low wheat price is low wheat price, and this pattern is starting to work, marking the end of the four-year bearish cycle on this market.

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First of all, let's destroy the myth that the world is now full of wheat.

According to the USDA forecast, the global wheat ending stocks at the end of 16/17 will total a record 248.37 million tons. At a first glance, this is a lot. But 45% of these stocks are in China that does not export wheat.

In other words, the wheat stocks are really huge, but nearly half of them will never get to the world market.

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The ending stocks themselves are not enough to analyze the world's wheat balance, so let's take a look at them in conjunction with the consumption forecasts.

The ratio between the world wheat ending stocks and the world level of consumption in 16/17 will be 33.8% - the highest indicator over the past 16 years. But, calculating the same ratio excluding the impact of China, we get only 22.2% - the lowest indicator over the past 5 years. In other words, in 16/17, relative to consumption, we have the smallest wheat stocks (excluding China) since 2012.

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Source of data: USDA

The low market price of wheat stimulates farmers to reduce the planted areas under this high-cost grain culture.

In 15/16 the planted area under wheat in the United States amounted to 50.2 million acres, and this is the lowest indicator since 1970.

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Source of data: USDA

We also see a similar situation in the world as a whole. According to the USDA, in 16/17 the world planted areas under wheat totaled 221.58 million hectares - the lowest indicator since 12/13.

Currently, the wheat is being traded near its 10-year low, and it will not stimulate the farmers worldwide to increase the share of wheat in the crop rotation.

The wheat price relative to corn also indicates that wheat is not prone to further reduction.

Wheat and corn are interchangeable in the diet of animals. At the same time, wheat is more nourishing. That is why the cheaper is wheat relative to corn the more breeders are likely to replace corn with wheat in the diet of animals.

The current ratio between wheat and corn futures is 1.17. This indicator is approaching the minimum value in the range of fluctuations over the past four years. Wheat is almost extremely cheap relative to corn.

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A direct consequence of the situation I've described in the previous paragraph is the growing world demand for wheat.

Since the beginning of 16/17, the USDA has raised its forecast of the world wheat exports already 5 times. There were no such drastic forecast revisions in the previous two years.

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Source of data: USDA

The USDA raises its 16/17 forecast of the global wheat consumption at a similar record pace. Since May this year, the USDA has already raised its 16/17 forecast of the global wheat consumption by 23.1 million tons.

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Source of data: USDA

Conclusion

Analyzing the stocks, the supply and the demand, I do not see any prerequisites to a further reduction in the wheat price. A long-term bullish trend has not yet maybe appeared on the wheat market, but the bear trend is probably already dead.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.