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|Wheat prices - will they continue their collapse in 2014?
By Agrimoney.com - Published 03/01/2014
Wheat prices suffered heavy losses last year, posting their biggest annual loss since 2008 in Chicago, the world benchmark market, of 22%.
In part this was down to a huge 2013-14 wheat harvest, estimated at a record 711.4m tonnes by the US Department of Agriculture, which has allowed some rebuilding in world inventories, meaning buyers face less competition for supplies.
The record Canadian wheat harvest, mainly of spring-sown and higher protein varieties, has pressed Minneapolis spring wheat futures in particular, which tumbled 27%. Paris prices fared better, falling 16.5%, given some support by a squeeze on rival - and typically competitively priced - supplies from the former Soviet Union.
But the record US corn crop also provided huge pressure, in threatening a switch by livestock feeders back from wheat to the yellow grain, left in short supply in 2012-13 by a drought-hit American harvest.
Can wheat prices maintain much of a premium over corn, in the face of this demand switch? Are prices, already at 19-month lows in Chicago, set for a further decline in 2014?
Bank of America Merrill Lynch
"So far, the wheat crop for 2014-15 is looking good in the US. Elsewhere, in Europe, planting conditions have been favourable in the north while the south has experienced some delays due to a late corn harvest delaying or preventing winter wheat plantings.
"The normalisation in world wheat production has allowed trade flows to normalise. US export sales have been fairly strong since August. China and other emerging markets, where imports suffered last year due to disappointing harvests in exporting nations, are seeing a rebound in imports this year. That is allowing them to restock.
"With US wheat competing fiercely with wheat from other sources, particularly Europe and Russia, prices have to remain competitive on the world wheat market, capping the upside to US wheat prices.
"The expected production improvements combined with relatively muted demand growth for wheat means stocks are set to rise by end of the current 2013-14 market year. With relatively comfortable ending stocks compared to historical norms, price risks remain to the downside."
"Contrary to the US Department of Agriculture's prediction made in February 2013 in its long-term forecasts up to 2022-23, the US has probably sown a larger area with wheat for the 2014 harvest compared with the previous year.
"Within the European Union, only France experienced certain problems with its winter wheat sowing. So all in all, EU wheat production may well increase next year, provided the weather plays along.
"In Russia, the outlook for the 2014 winter wheat harvest is better than was initially feared. In Ukraine too, the situation does not appear nearly as problematic as was feared for a time.
"The expected production improvements combined with relatively muted demand growth for wheat means stocks are set to rise by end of the current 2013-14 market year.
"With relatively comfortable ending stocks compared to historical norms, price risks remain to the downside."
"US winter wheat acreage is likely to rise as double cropping aids expected returns. We expect winter wheat acreage to rise about 1% year on year to 43.35m acres in 2014-15. Current soybean returns may encourage additional farmers in the southern Corn Belt to plant winter wheat followed by double-cropped soybeans.
Morgan Stanley forecasts for wheat prices 2013-14: $7.10 a bushel 2014-15: $7.20 a bushel Price estimate for year average, front Chicago futures contract
Morgan Stanley forecasts for wheat prices
2013-14: $7.10 a bushel
2014-15: $7.20 a bushel
Price estimate for year average, front Chicago futures contract
"However, global production is still seen falling on normalising yields. We model global production wheat production falling 1% year on year to 700.3m tonnes as global yields normalise from the record highs in 2013-14.
"With supply growth poised to underperform the other grains, wheat prices should retain a premium in 2014-15. Although we forecast declining prices across the complex into 2014-15, wheat may be poised to outperform the other grains.
"Our predicted growth in corn and soybean stocks - seen at 6% and 12% year on year, respectively - will likely dwarf the 3% year-on-year increase forecast for wheat stocks."
"Looking at the US wheat market, the stocks-to-use ratio for 2013-14 is still at a comfortable 23.6%. Despite lower US ending stocks, the rest of the world are flooding the wheat market with abundant supplies. This provides downside to US wheat prices as US wheat has to be priced competitively now.
"With such abundant supplies of wheat as global production ramped up in 2013, we do not expect the increase in consumption to provide significant support to wheat prices, especially with such bearishness stemming from the large amounts of wheat in the global market.
"US wheat has to be priced competitively in the export market, especially among other exporters that experienced large wheat harvests, or risk further losing its competitiveness in the export market.
"Either way, it all paints a bearish picture for US wheat."
"Wheat prices are delicately balanced heading into 2014, with tightening exportable stocks levels increasing risks for new crop pricing.
"In contrast to other major grains and oilseed markets, wheat fundamentals have seen only limited rebalancing in 2013, despite an 8% lift in global production.
"Significant fundamental rebalancing in other markets, importantly corn, should result in a weakening demand base for wheat in 2014. However, prices will need to factor in production risks through the growing season given the tighter inventory environment, particularly among major exporters.
"While we do not expect a lot of upside for flat price, wheat prices are likely to maintain a strong premium over corn during 2014."
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