Current Factors Influencing the Grain Markets
Over the last three seasons we have seen global grain inventory balance sheets expand with multiple seasons of (overall) well yielding harvests in Australia, the Black Sea and North America. This has led to an environment in which we have seen prices decline for cereals. However, consumption growth remains very solid into South Asia for both cereals and oilseeds.
Any analysis must start with the supply and demand tables to paint a picture of the global scenario.
The below is derived from the United States Department of Agriculture statistics.
The simplest way to understand what is driving pricing from the above tables is to analyse the carryout stocks represented as a percentage of consumption. From that point, we can see whether the function of an efficient marketplace is to increase or decrease the price of the commodity. This function will either serve to conserve stock in short supply with higher pricing, or drawdown stocks in a surplus environment with lower pricing.
We can withdraw from the above chart:
- Wheat prices have decreased as stocks have increased
- Corn prices have decreased as stocks have increased
- Oilseed prices should remain more well supported due to a drawdown in canola and soybean failing to increase supply
- Barley stocks have declined this season but will be reliant on Chinese demand to drive pricing for Australian stock
Wheat production has been fairly consistent in Australia over recent years. However, most industry participants are projecting a larger production year for 2016/17 providing a reasonable finish to the season.
In reality, the increased supply in wheat stocks has come from producing origins abroad. Growth in wheat production has occurred over the last five seasons in the Black Sea and Europe. Russia, Ukraine and Europe have combined for a projected, 57MMT increase in production.
It is important to note that wheat consumption has grown dramatically in recent times. In the last 10 years, wheat consumption has increased by 130MMT. This is a direct result of the Asian Food Bowl theory. As more people enter the middle class in Asia their diets improve and consumption of grain in the form of noodles, pasta or bread increases. It is also worth noting that a large part of the increase is due to increased consumption of meat protein which is a by-product of grain by way of feeding cattle, chicken and pork for human consumption.
Over the third and fourth quarter of 2016 we must work through the following to get a better understanding of the real balance sheets for 2016/17 season as opposed to the current projections:
- A reasonable finish to the Australian winter cropping season
- North American summer cropping of corn and beans
- The setup for winter wheat in North America, European Union and the Black Sea; all of whom are major exporters
Basis the above, production risk will continue to ebb and flow as the seasons work through. Any real supply disruption, be it production or political, will have a highly bullish impact on pricing due to the ever increasing consumption rate.
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