Over the course of the last two days of June, wheat prices demonstrated a substantial upward move, with the front-month contract rising by more than 10 percent from 470 to 525 cents per bushel. As indicated by the latest Commitment of Traders data, non-commercial short positions have been prevalent prior to the move, fueling a short covering that continues to influence the latest price dynamics. Nonetheless, latest USDA global production estimates were revised slightly higher in the latest report published in June, with expected 2017/18 production raised to 739.5 from 737.8 thousand tons. With consumption projections remaining unchanged at 734.8 thousand tons, USDA currently expects global wheat inventories at 261.2 thousand tons in 2018. After bottoming in late April, wheat futures prices have been demonstrating a strong rally influenced by significant short covering. Nonetheless, wheat futures have been trading sideways in the latest price action, suggesting that the rally is lacking conviction as the large traders remain cautious.
Due to downward production revisions for Brazil, China, Mexico and Russia, global corn production is projected significantly lower in comparison with the last year’s figures. USDA currently estimates 2017/18 production at 1.03 billion tons, down from 1.07 a year earlier. Latest 2017/18 estimate was also revised slightly lower from 1.033 billion tons forecast in May’s report. Global consumption continues to grow and is forecast to reach 1.06 billion tons, with corn inventories expected to decline from 225 to 194 million tons in 2017/18 season.
Mainly due to rising popularity of soybean feed in China, 2017/18 global soybean consumption is forecast to increase 4 percent to 301.5 million tons per the latest USDA estimates. Expected to significantly exceed consumption during the next season, global production is expected at 344.7 million tons, with inventories rising to 92.2 million tons. Fueling a 9 percent rally from the June lows, latest weather news forced large traders to cut back on short positioning.
Demonstrating continued growth, next season’s soybean meal consumption is forecast to add 10.9 million tons from the current 2016/17 level of 223.1 million tons. Estimated at 237 million tons, 2017/18 production is expected to outweigh consumption by 3 million tons. With soybean meal inventories remaining relatively stable, USDA forecasts next season’s inventories at 12.5 million tons.
Current USDA forecasts for rice suggest only a minor production decline from the record levels of 483 million tons in season year 2016/17, with 2017/18 figures estimated at 481 million tons. Despite traditionally relying on domestic production, Bangladesh - one of the leading consumers of rice – is expected to import approximately 600 thousand tons during the next season. In the meantime, global rice consumption trends are still in decline, with Asian countries demonstrating increasingly higher appetite for less traditional types of food. As a result, 2017/18 global inventories are forecast to reach its high since 2002 at 120.5 million tons.
In June, USDA cotton consumption forecasts for the next season year were revised higher to a total of 116.5 million bales, a 2.6 percent increase year-over-year. Production was revised higher as well, with current estimates suggesting an 8.7 million bale increase from the current season’s figure of 106 million bales. Despite the shrinking difference between consumption and supply, global inventories are forecast to decrease 1.6 million to 87.7 million bales in 2017/18 season year. Cotton futures remain in backwardation, with the July contract – currently at 75.15 cents/lb - trading with a 10.2 percent premium to the December contract amid expectations of higher production levels in China, Pakistan and Mexico. Despite the short-lived spike in mid-May, large traders have been cutting their long exposure since early March.
There were no significant fundamental changes to sugar outlook in USDA’s 2017/18 sugar report published in May. As a result of higher 2017/18 crop expectations, sugar prices have been in a freefall since the beginning of the year, with the first signs of a potential reversal appearing at the end of June. Having bottomed out at 12.53 U. S. cents per bushel, the soft commodity has bounced back and is currently trading just under 14 U.S. cents. However, despite the latest reversal, large trader positioning and sugar price seasonality remain bearish. At 179.6 million tons, latest USDA estimates imply a 5.2 percent year-over-year production increase during the next season year, with significant impact from higher Brazilian crops and the recent cutback on European sugar production quotas. In the meantime, even though the global sugar consumption is forecast to edge slightly lower to 171.6 million tons, USDA estimates a 1.5 percent year-over-year decrease in global inventories (forecast at 38.3 million tons) during the next season year.
Despite the majority of Brazil’s coffee trees experiencing the off-year of the 2-year production cycle, top growing regions of Southern Minas Gerais and Sao Paulo are demonstrating positive production dynamics, partially, contributed by sufficient rainfall. Even though the water supply issue of significant importance and is believed to reduce the overall production by at least 40 percent, Brazil’s combined production of Arabica and Robusta is only forecast to demonstrate a 7.1 percent year-over-year during the 2017/18 season year. Offset by higher output in Vietnam and Mexico, global production is forecast to demonstrate a mere 0.1 percent increase and reach 159.3 million bags. While the USDA 2017/18 estimates suggest a 2.1 million bag increase in global consumption, ending inventories are forecast to decline by 1.1 million to 34 million bags. Having followed a strong downtrend since late January, September contract bottomed at 115.50 and demonstrated a 10.8 percent reversal influenced by significant short positioning prior to the move.
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. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article has been written for informational purposes only. Nothing expressed in the article may be viewed as an investment advice. Aquarium Investments is an EU-based company specializing in global asset management services.