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Changing market dynamics and the prospect of a fourth consecutive record harvest
With the northern hemisphere harvest moving toward the final stages, it is shaping up to be an interesting year for the global wheat market. Following three consecutive record harvests, the world has been very well supplied with wheat over recent seasons. Despite record demand, huge crops have seen world stocks swell to all-time peaks. This has put pressure on prices; since mid-2013, average milling wheat export prices (US$ fob) have fallen by about one-third. World production for the current 2016/17 season could potentially be a record for a fourth consecutive year, but despite this, there are signs that the dynamics of the market are changing. The global trading environment is being complicated by disappointing harvest quality in major growing areas, including in parts of the US and the EU. So, although overall world availabilities could be at their highest ever, securing supplies of the desired milling quality may be somewhat harder, and more expensive, than in recent seasons. The impact of this is already visible in recent price movements. Reflecting abundant supplies overall, the Council’s index of world average export prices is at around 10 year lows. However, price premiums for the best quality milling wheat, with high protein levels, good hagberg falling numbers and test weights, are widening. The way in which this affects global trade will be of particular interest to the IGC. Competitively priced supplies from the EU and the Black Sea region (Kazakhstan, Russia and Ukraine) have captured an increasing share of global wheat trade in recent years, with their shipments reaching all-time peaks. This has largely been at the expense of US
market share, as sales from that origin, which in the past was by far the largest global supplier, have retreated to around 40-year lows. A strong US dollar has contributed to poor price competitiveness for US shipments to some of the world’s key buyers in North Africa and Near East Asia, where sales from Europe and the CIS have done particularly well. Potentially the key change for trade in the 2016/17 (Jul/Jun) season will be a slump in exports by the EU, with these currently projected at around a four-year low by the Council. Unusually for the harvest period, EU export prices have risen in recent weeks as concerns escalated about the size and quality of the harvest, especially in France and Germany. While milling wheat export quotations in Russia and Ukraine have edged higher too, they have stayed relatively low and this has improved the attractiveness of their new crop supplies to potential importers. The US is also expected to benefit from the problems in Europe, with a rebound in exports possible over the coming year, especially for higher-grade milling wheat. For the first time in around two years, US Hard Red Winter milling wheat is priced (on a US$ fob basis) below equivalent supplies in the EU, albeit still more expensive than Russian wheats. If these price relationships are maintained, 2016/17 could see US exports reach a three-season high, but Russia will probably be the single largest wheat exporter for a second consecutive year. Given the worries about availabilities of high quality wheat from some of this year’s crop, market participants will be monitoring closely the outcome from those areas that are still to be combined. Early signs from the US spring wheat harvest are promising, with mostly good yields and quality reported. However, traders will also be watching to see if current favourable prospects for crops are realised in Canada, Australia and Argentina. Amy Reynolds, Senior Economist, IGC
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