MELBOURNE, Aus. — Heavily supplied global wheat markets aren’t likely to bring smiles to the faces of world grain producers in 2012, says an agribusiness expert with National Australia Bank.
However, investment in agricultural commodities by money managers and hedge fund operators could result in significant short-term market volatility, particularly if key production areas are affected by bad weather.
Michael Creed, an agriculture analyst with NAB, told grain industry executives in Melbourne earlier this month that market fundamentals suggest a bearish outlook for wheat in 2012.
However, short-term rallies are possible.
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“The fundamentals of the global wheat market are very comfortable, make no mistake about it,” Creed said.
“We expect to enter the 2012-13 marketing year with a stocks-to-use ratio of around 31 percent. That makes for a very comfortable market, and it looks like stocks are likely to be added to again this year.”
However, the effect of managed funds on grain prices shouldn’t be overlooked, he added.
Creed said fund managers are investing aggressively and have been putting money back into commodities markets.
Short positions in Chicago Board of Trade wheat equate to nearly 13 million tonnes of production, a situation that could support prices in the event of a significant weather-related production failure.
“If we have some sort of hiccup in the weather or if we have some sort of event that requires those funds to suddenly reverse their positions and pull out of commodities, that will provide for a very bullish short-term outlook for prices,” he said.
“The simple fact is that it’s very hard to … buy 13 million tonnes of grain in a day or two, so even though the fundamentals are very bearish … the market structure is actually quite bullish and this could make for a very interesting situation.”
In the United States, corn stocks have been tight and support payments to farmers are expected to rise. If that happens, corn acreage will increase and prices are likely to soften. Wheat would inevitably follow.
“There’s definitely a significant incentive out there … for (U.S.) farmers to plant more acres of corn, so the support you’re likely to see (for wheat) is likely to pull back a bit.”
Creed said burdensome wheat supplies, large Black Sea exports and uncertainty over the European financial situation will also affect markets.
Black Sea production and exports are expected to reach record levels in 2012-13, barring a weather disaster, according to the Australian Bureau of Agricultural and Resource Economics and Science (ABARES).
In an effort to move excess wheat to world markets, the Khazakhstan government offered transportation subsidies of nearly $40 US per tonne to Kazakh exporters who moved grain through Baltic and Black Sea ports, ABARES said.
Europe is another wild card.
“The big elephant in the room, as far as the economic outlook for the next couple of years, is Europe.”
He said the sovereign debt crisis that has so far been focused on Greece could easily spread to other countries, especially those that have low productivity, high unemployment and significant exposure in European bond markets.
Spain and Italy are trouble spots that NAB economists are watching closely.
Europe has established the European Financial Stability Fund to support ailing economies and protect against government default.
The value of the fund is estimated at $980 billion, but that pales in comparison to the value of government bonds held by national treasuries.
“The sovereign debt crisis in Europe has spilled over into the euro core,” said Creed. “Greece in itself is not really that much of an issue … but the markets are still a bit suspect … and if the contagion spreads to Spain and Italy, that would be big. They hold about 1.9 trillion euros ($2.6 trillion) in bonds so you can see that 750 billion euros ($980 billion) is not going to go that far.
“We don’t expect this to spiral out of control just yet, but we are closely watching the Spanish position because in our view, that’s where the risk is over the next couple of years.”
Financial uncertainty in Europe is a critical consideration for commodity markets because fund managers are more likely to take positions when financial markets are less volatile.
Despite his gloomy assessment, Creed said the long-term outlook for agricultural markets remains strong.
Global demand for food is increasing and will continue to be driven by increasing personal wealth in emerging economies such as India, China and Indonesia.
U.S. economic figures are another source of optimism, with recent improvements in gross domestic product, job creation, housing markets and corporate profits, he said.
