How Did World Grain Ending Stocks Increase?
Chris Coore, Agfarm Advantage Manager
April 15th 2019
We’ve been hearing for the past 12 months that poor production has caused global demand to outweigh global production for the first time in many, many years. This was expected to reduce ending stocks and increase the need for an incredible year to replenish them. But, much to the market’s surprise, this didn’t occur, and we’re expected to close out the year with increased ending stocks. So, let’s take a look at how this happened and what it means for prices moving forward.
The significant drop in production last year, as seen in the northern hemisphere production table below, caused a world-wide rally in grain prices to help curb demand and ration the limited supply. This is normal supply and demand behaviour. But it would seem prices were in fact too high causing key demand points like China and Saudi to gradually deplete their own stock piles of wheat and barley rather than purchasing more. Essentially, the price rally cut too much demand out of the market. So instead of just curbing the demand profile by a little, global demand decreased, which has been an extremely rare event over the past 30 years. And as a result, in a very small global production year, world ending stocks are expected to increase.
On top of increased ending stocks there is an inverse in price from the 2018/19 season to 2019/20 season meaning prices are lower in the new season. So, if you are holding 2018/19 grain into the 2019/20 season, you will likely take a financial loss when the price steps down. To rectify this, prices fell sharp and quick to buy more demand and avoid probable loss.
Moving forward, if we see global and domestic supply levels normalise and prices subside, it is reasonable to assume that we will see a strong uplift in global demand. This will be driven by key consumptive homes buying more than normal as they look to replenish their stock piles with prices at an inverse from current levels.
Will supply levels normalise this season?
Russia, as you can see in the first table, has dramatically increased their production over the past 10 years, so they are key in returning to normal supplies. Currently, the combined production for wheat on the first table has total supply at 447MMT which is 10% above the 10-year average of 407MMT. But it is the time of year were speculation on production runs rife with Australia on the verge of sowing and the northern hemisphere heading into their key production phase. Unfortunately, though, we’re still kicking up dust at home and in need for substantial rains across the Australian cropping belt in the coming weeks to ensure we get a decent winter plant and at least an average crop. There is still plenty of time before the sowing window closes and we still have the potential for a big wheat and barley crop. However, with ANZAC day just around the corner, tension is building as to whether we will get enough fast enough to give us a good start.
What does this do for grain prices?
Currently, there is an inverse in price from old season to new season crop in Australia which suggests the market has priced our new crop to be much larger than the previous season. If the rain eventuates and we get a large new season crop, domestic prices will likely soften. If we don’t get the needed rain ahead of planting and wheat, barley and canola acres are reduced, we would expect new crop prices to rally in line with the current season. Globally, it’s expected the demand side of the market needs more supply than they have had over the past 12 months to replenish stocks, which should bode well for global prices into next season.
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