In Commodity News 30/09/2016
The world has entered its third year of record wheat inventory, but demand is stronger than meets the eye. World wheat stocks-to-use is actually tightening up, but China’s stockpiling tendencies make the market hard to read.
Stocks-to-use is an important ratio in commodities because it is perhaps the simplest way to simultaneously capture both supply and demand. In grains, this ratio relates the marketing year ending stocks to the total amount used during that year, including all forms of consumption and exports.
The lower the ratio, the sooner the supply will run out given current demand levels. Low ratios are usually supportive of futures price, but there is no specific ratio that will guarantee a specific price.
For wheat, one online source suggests that a global stocks-to-use ratio at or below 20 percent has typically led to strong price advances (here). With wheat futures near 10-year lows, a price rally would be a welcome change in pace.
Using this benchmark, the 28 percent global ratio that the U.S. Department of Agriculture has indirectly projected for 2016-17 does not appear encouraging on the surface, especially as this would be a 15-year high.
Indeed this projection has dropped by 2 percent over the past four months and the year-on-year increase in stocks-to-use is the smallest in four years, but one has to dig a little deeper than that to see the optimism.
THE CHINA EFFECT
Enter China, the notorious hoarder of grains.
Questionable policies in recent years have incentivized Chinese farmers to produce enormous quantities of wheat – regardless of demand – based on a guaranteed price set by the government. Coupled with the fact that China exports a negligible amount of wheat, domestic wheat stocks have ballooned.
China has generally held at least one-third of the world’s wheat supply for nearly 30 years, and it will account for 44 percent of global wheat stocks by the end of the current marketing year, its largest share since 2000-01.
USDA’s projections suggest that China’s wheat stocks-to-use-ratio stands at 94 percent. Based on some industry estimates of China’s inventory, this ratio could be well over 100 percent, meaning that China has more than a year’s worth of wheat tucked away.
For comparison, the United States is anticipated to have the second highest stocks-to-use ratio in the world this year at 47 percent.
In 2016-17, China will skew the world wheat stocks-to-use ratio by the largest amount in 16 years – almost 10 percent. If China was completely disregarded from the mix, the world stocks-to-use ratio would be 18 percent. This would be below the suggested threshold of 20 percent for price favorability and 1 percent lower than the previous two years.
Perhaps a more important observation is that under this exercise, global stocks-to-use has had a relatively steady nature, remaining at nearly the same level for the last five years instead of the 7 percent increase that the raw data suggests.
This applies the important perspective that despite the world continuing to produce massive volumes of wheat, demand is keeping up. And in reality, both short- and long-term trends show that global demand is actually increasing at a faster rate than production.
STEEPER HILL FOR USA
Despite producing the largest wheat crop in eight years, the United States has begun digging itself out of a virtual wheat overload.
Analysts predict that the USDA’s quarterly grain stocks report due at noon EDT (1600 GMT) on Friday will reveal the largest Sept. 1 wheat supply since 2010 – some 2.4 billion bushels.
When the 2015-16 U.S. wheat marketing year ended on May 31, a 43-year low in exports combined with unimpressive domestic consumption sent the wheat stocks-to-use ratio up over 50 percent for the first time since the mid-1980s.
But the turnaround has already begun. Since USDA’s initial 2016-17 estimates in May, the U.S. wheat stocks-to-use ratio has dropped by 2 percent and now stands at 47.5 percent.
USDA expects a drastic pickup in wheat for feed this year driven by lower projected cash prices and the wheat exporting campaign has already gotten off to a promising start – both key supporters of use.
However, the United States has a lot of whittling yet to do on its wheat inventory to bring stocks-to-use down and historically, large year-on-year drops in the ratio only result from a considerable supply disruption either domestically or in a major international source region.
So unless the 2017-18 wheat harvest completely tanks somewhere, the United States may be stuck with a bit more wheat supply than it would prefer for the foreseeable future.
Source: Reuters (Karen Braun is a Reuters market analyst. Views expressed are her own.) (Editing by Lisa Shumaker)
