Global Supply and Demand; What It Does to Wheat Prices

Chris Coore, Agfarm Advantage Manager

August 15th 2018

Global supply and demand… it’s pretty simple right? You take a look at how much the world produces, how much the world consumes, and how much carry out we have from the previous year. Done! Well, it’s not quite that easy. Although the formula works, and as a base it works well, to make an educated assumption on price movement it is vital to dig down in the detail to truly understand where the supply sits, where the demand is coming from, and who is going to replenish consumers of grain when stocks run low. As wheat supply starts to dwindle, it’s a perfect time to practically pull apart supply and demand and truly understand the affect it has on grain markets locally and globally.

On the 11th of August 2018 the United States Department of Agriculture (USDA) released their latest predictions for world grain production. The market was expecting large falls in global wheat production however the USDA surprising only reduced it by 6.6 million metric tonnes (MMT) putting this year’s global wheat production at 729.628MMT. To give you an idea of how this number is made up and how it compares to last year, production estimates for countries you rarely hear of include Mexico at 2.8MMT down from 3.55MMT, Tunisia at 1.25MMT an increase of 140KMT, Japan is likely to produce a similar amount of wheat as last year at 860KMT and Tajikistan is likely to produce 150KMT less than last year at 600KMT. Moving to the big grain producers, Russia’s production is predicted to reduce 18MMT year on year, the EU is predicted to reduce 14.2MMT and little old Australia is surprisingly still pegged at 22MMT. Looking at this and doing the numbers, you can feel the chill run down your spine ‘that’s a fair bit of wheat’. But the global grain industry did predict wheat production to drop further, and because of this, the dramatic price increases we have seen recently have somewhat stabalised.

Now, let’s use China as an example of demand. China’s role in the grain market is unique. They are one of the largest producers of wheat at 127MMT and one of the largest importers too. You would remember a little while ago China was the ‘talk of the town’. The world was ‘awash with wheat’ and China, being the Bermuda Triangle of grain storage, was holding a large portion of it. Well, over the coming 12 months, predictions show China’s wheat production will drop 2MMT. To offset this, China’s wheat imports will increase from 3.7MMT to 5.1MMT to maintain a ‘healthy’ supply of wheat, healthy meaning fit for human consumption. With world wheat production dropping, who will meet China’s demand? In any other year, Aussie grain growers would be jumping for joy at this news, as we’re ideally placed to replenish this market. But this year, our own supply and demand story has changed things.

To put this in perspective, the 10-year average of wheat production in Australia is 24.5MMT. Despite the USDA report stating Australia will grow a 22MMT wheat crop this year, local market participants are pegging it at sub 20MMT. In a nut shell, Australia’s typical grain model is; WA and SA are the big exporters while the East Coast mainly feeds the domestic market. At the moment, Australia’s East Coast is grappling with the ‘big dry’ making things more than a little difficult to keep up with domestic feed demand. So, to ensure this demand is met, grain is being sourced from our export states, SA and WA. This local demand story has poised the Australian market structure to see a reduction in exports. If you couple this with China’s likelihood of increasing their wheat imports and global production falling for the first time since 2012, you start to see the intricacies of supply and demand and how certain elements affecting one country can have a significant flow on effect for another and another and another.

So, considering all the above, what is our educated assumption on wheat price movements?

With production dropping for the first time in six years global wheat markets are fundamentally supportive as wheat growing countries are trying to keep grain within their shores therefore rationing demand with higher prices. The export market still has shipments they need to fill, so this should keep export bids in a good realm. If you look at Australia, the domestic demand is running its own race and with the added element of countries like China looking to source more grain than usual, we expect grain prices to continue to be well bid, at least until the industry has a much better handle on Australia’s crop size.

To print or download this Agfarm World Market Update, click here.

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