Uncertain wheat demand hangs over market

Feed wheat faces stiff competition from corn while slumping ethanol production also reduces industrial use of the crop

Most of the news in today’s wheat market revolves around supply, but demand could be the real driver, says an industry official.

For the first time in a long time projected global usage of the crop is expected to fall short of the 10-year trend, said Abdolreza Abbassian, secretary of the Agricultural Market Information System (AMIS).

AMIS is forecasting 754 million tonnes of utilization, 1.2 percent below the previous 10-year average despite what is expected to be record consumption in the food market.

Feed wheat use, by contrast, is forecast to drop off dramatically due to stiff competition from corn and other coarse grains. The biggest decline will be in the European Union.

“We believe that wheat will certainly not be price competitive, so as a result there will be far more corn going to feed than wheat,” he told delegates attending a virtual conference organized by the International Grains Council.

Industrial use of wheat will also be hampered by reduced global ethanol production due to slumping oil prices and faltering fuel demand caused by COVID-19.

All of the food, feed and industrial forecasts are subject to change due to the rapidly evolving post-COVID consumption patterns.

“I’m giving you the general picture of demand that is first, not that robust, and second, very uncertain,” said Abbassian.

His thoughts on demand were echoed by Jean-Francois Lepy, general manager of Soufflet Negoce, Europe’s leading privately-owned cereal buyer.

He is forecasting a five percent drop in feed wheat demand due to slumping beef consumption. Lepy also expects below-average flour demand in 2020-21 as restaurants around the world struggle to regain their footing.

Abbassian said the upshot of poor utilization is that world wheat stocks are forecast to rise by four million tonnes to 280 million tonnes, creating an unwieldy world stocks-to-use ratio of 36.3 percent.

But that ratio includes China and India, two countries that hoard the commodity rather than exporting it.

That is why he prefers to look at the major exporters’ stocks-to-disappearance ratio. That ratio is expected to fall slightly to 15.7 percent, an eight-year low.

“Somebody looking at this figure would say the wheat market is actually getting quite a bit tighter,” said Abbassian.

Things could get dicey if there was a forecast for booming trade in the commodity, but that is not the case.

Imports are expected to remain normal with the exception of some North African countries. Shortfalls in Morocco’s wheat production could push imports to a record 5.5 million tonnes, up 500,000 tonnes.

Taoufik Saidi, chief executive officer of the Tunisian Grains Board, expects Tunisia to import 1.2 million tonnes of milling wheat and 750,000 tonnes of durum.

The normal volumes for that country are 978,000 tonnes of milling wheat and 556,000 tonnes of durum.

Abbassian said the increase in sales to North Africa will be offset by a two million tonne drop in Turkey’s imports as it rebounds from a terrible 2019-20 crop.

World exports are forecast to reach a record 178 million tonnes with the biggest increases coming from Australia’s 14 million tonne program, which would be 25 percent above the previous three-year average, and Canada’s 25 million tonnes, a 10.8 percent increase.

Amy Reynolds, senior economist with the IGC, said North American exporters are going to have to make up for a seven million tonne drop in exports out of the Black Sea and the European Union.

“Reduced availabilities in those countries will put more burden on other global exporters to make up for that shortfall,” she said.

She anticipates a rapid pace of Black Sea shipments early in the 2020-21 campaign because exporters fear another round of government imposed trade restrictions, particularly if the harvest underperforms.

Russian exporters may also be facing stiff competition from the domestic market because of sky-high flour prices in that country, said Reynolds.

Abbassian said last year at this time global wheat prices were sharply rising. This year it is the exact opposite because prices have been on a steady descent the last couple of months, heading toward 2019 levels.

One clue for where prices go from here is to follow what the managed funds are doing in the futures market, where they just established a modest net short position after a prolonged period of being net long.

“The wheat market doesn’t look like it’s going to be dynamic because demand is going to probably remain subdued,” he said.

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