Production issues taking toll

A rally mid year has become a standard feature of the wheat market. However, in most cases these mid-year rallies have been fuelled by production or political issues associated with the Black Sea countries, and have run out of steam.

This year's price rally was early in the year, reminiscent of old seasonal price moves driven by risk premiums early in the northern hemisphere growing season, and this year fuelled by the coronavirus pandemic and panic buying of staple foodstuffs on a global scale.

As we saw prices decline into the northern hemisphere harvest it was looking like we might be seeing a continuation of the 'traditional' seasonal price pattern, with a mid-year harvest low, and then a more gradual rally into the end of the calendar year.

That 'traditional' price pattern used to be disrupted when the northern hemisphere crop began to fade from expectation, triggering a mid-year price spike that held into the end of the year.

The strange thing about this year is that we were seeing production issues on multiple fronts (North America, Europe and the Black Sea), but until this last week, the market was not responding. So, what changed?

The change seems to be a round of crop production downgrades that confirm that the multiple production issues may be taking their toll on production totals. It is still early in the harvest period for Europe and the Black Sea, but early results are showing the world that maybe production will be pulled back, and possibly by more than expected.

Last week unofficial forecasts hinted at declines in production estimates, and on Friday night the United States Department of Agriculture figures added some confirmation to this. Global production estimates were reduced by 4.12 million tonnes, and after allowing for reduced consumption and a lift in carry in stocks, carry out stocks were reduced by 1.25mt, compared to June.

When we drop China from the numbers the stocks decline for the month is 1.54mt. However, non Chinese stocks are still pegged to rise by 6.72mt for the year.

This is where it gets interesting, because the headline global numbers continue to show a healthy growth in global stocks. The issue is that 61 per cent of global stocks are now held by China and India. In fact, the growth in stocks in China and India account for the entire lift in global stocks.

Therein lies the issue that is being uncovered in the latest estimates. Stocks being held by nations that are currently involved in the global wheat trade are projected to flatline this year.