Wheat: Is It Really 2007/08 All Over Again?
After a torrid week, now that the phones are silent I thought I'd sit down and try and make some sense of the wheat market, to attempt to analyse just how bad things are and if the recent surge in prices is really justified.
Let's start by having a look at the good old fashioned supply and demand perspective.
SUPPLY
The USDA currently have global wheat production in 2010/11 at 661 MMT, that includes 53 MMT from Russia, 14 MMT from Kazakhstan, 20 MMT from Ukraine and 141.8 MMT from the EU-27. It seems pretty clear that all of those numbers are too high, collectively around 19 MMT too high by my estimates in the table lower down on the right.
Knocking 19 MMT off the USDA's world production estimate gives us a probably more accurate figure of 642 MMT. (Much of the reason for the difference between that number and the total I have is down to China. At this stage that discrepancy doesn't matter too much, unless we were to see China suddenly emerge as a large importer of wheat).
DEMAND
The USDA say that the world will consume a record 667 MMT of wheat this year, with prices having risen so sharply that is probably also overestimated but let's run with it for now.
By the wonders of my mathematical brain, that tells me we are going to be 25 MMT wheat deficient in 2010/11, which equates to around fourteen days worth of consumption. Effectively that puts us all on a fortnight's wheat-free diet.
STOCKS
If we don't want to go on this diet then we're going to have to eat into last season's reserves. According to the USDA there was 193 MMT of those at the end of 2009/10, or 105 days worth of consumption.
PANIC OVER THEN?
Hurrah, bacon sarnies all round. We CAN still manage to munch our way through 2010/11 without needing to give up bread for a fortnight AND still have more than 90 days worth of stocks to fall back on.
Although of course where those stocks are is pretty important, I mean we can actually get at them can't we?
Well, our mates the Indians held about 16 MMT of them, and I think I'd rather take the fortnights diet option than attempt to munch my way through what they've got in store. Our other chums of truth economy the Chinese were supposed to have 56 MMT in reserve at the end of last year. If they really did have is immaterial at the moment, as we know that it's pretty likely that whatever they've got they aren't going to be wanting to sell it to us are they?
Egypt were sitting on a further 5 MMT, and they're most certainly not going to be selling that. Not with a huge question mark now hanging over whether the Russians are going to ship any of their existing commitments when the export ban comes in a week from now.
The truth then seems to be that of this 193 MMT some 76 MMT isn't going to be coming onto the market any time soon, whittling "rest of the world" 2009/10 reserves down to around 117 MMT.
So let's take this wheat hungry trio out of the equation and have a look at...
THE REST OF THE WORLD
Us lot will account for 463 MMT, or around 70%, of world consumption this year. We had 116 MMT (difference due to rounding) of the world stocks at the end of 2009/10, or enough to keep us going for 91 days. We're going to produce 459 MMT, according to the USDA, but remember that this figure is probably overstated by 19 MMT re Russia, Kazakhstan, Ukraine and Europe.
Factoring the 19 MMT overstate in means we're going to eat 23 MMT more wheat than we produce this season, which would drop our reserves below 100 MMT - 76 days worth of supply. And that's without the current market price rationing demand.
In the last big price spike of 2007/08 that figure fell to only 45 days.
In the "awash" and "glut" days of 2009/10 the rest of the world was sat on 94 days worth of wheat, we're still significantly closer to that than we are to 2007/08.
CONCLUSION
Whilst there is certainly some justification in the recent price rally, the fundamentals of supply and demand don't really warrant one of this magnitude. Although there are legitimate concerns over winter wheat planting prospects in Russia this year, European and US farmers will be only too keen to embrace the current price levels with significantly higher sowings. That is exactly what they did for the 2008 harvest which saw EU output up by 26% and US production up by 22%.
Despite London, CBOT and Paris wheat all closing higher on the week, all three actually closed nearer the bottom of the week's trading range than the top.
Is the top already in? That as ever is a difficult one to call, and the funds are certainly likely to have another attempt at sending it higher again. I'm tempted though to say yes, so beware of the "bull trap". Somebody paid GBP169 for November London wheat last week, I guess that could easily fall into the "delusion" category.
There's now 6.4 MMT worth of open interest in November Paris wheat. I think I'd rather be first out than last out if I was sitting on that.
Footnote: I treated myself to an afternoon in the pub Friday, the taxi driver and at least three other people I met with no involvement whatsoever in the grain trade all wanted to talk to me about wheat. That probably tells you all you need to know.
Let's start by having a look at the good old fashioned supply and demand perspective.
SUPPLY
The USDA currently have global wheat production in 2010/11 at 661 MMT, that includes 53 MMT from Russia, 14 MMT from Kazakhstan, 20 MMT from Ukraine and 141.8 MMT from the EU-27. It seems pretty clear that all of those numbers are too high, collectively around 19 MMT too high by my estimates in the table lower down on the right.
Knocking 19 MMT off the USDA's world production estimate gives us a probably more accurate figure of 642 MMT. (Much of the reason for the difference between that number and the total I have is down to China. At this stage that discrepancy doesn't matter too much, unless we were to see China suddenly emerge as a large importer of wheat).
DEMAND
The USDA say that the world will consume a record 667 MMT of wheat this year, with prices having risen so sharply that is probably also overestimated but let's run with it for now.
By the wonders of my mathematical brain, that tells me we are going to be 25 MMT wheat deficient in 2010/11, which equates to around fourteen days worth of consumption. Effectively that puts us all on a fortnight's wheat-free diet.
STOCKS
If we don't want to go on this diet then we're going to have to eat into last season's reserves. According to the USDA there was 193 MMT of those at the end of 2009/10, or 105 days worth of consumption.
PANIC OVER THEN?
Hurrah, bacon sarnies all round. We CAN still manage to munch our way through 2010/11 without needing to give up bread for a fortnight AND still have more than 90 days worth of stocks to fall back on.
Although of course where those stocks are is pretty important, I mean we can actually get at them can't we?
Well, our mates the Indians held about 16 MMT of them, and I think I'd rather take the fortnights diet option than attempt to munch my way through what they've got in store. Our other chums of truth economy the Chinese were supposed to have 56 MMT in reserve at the end of last year. If they really did have is immaterial at the moment, as we know that it's pretty likely that whatever they've got they aren't going to be wanting to sell it to us are they?
Egypt were sitting on a further 5 MMT, and they're most certainly not going to be selling that. Not with a huge question mark now hanging over whether the Russians are going to ship any of their existing commitments when the export ban comes in a week from now.
The truth then seems to be that of this 193 MMT some 76 MMT isn't going to be coming onto the market any time soon, whittling "rest of the world" 2009/10 reserves down to around 117 MMT.
So let's take this wheat hungry trio out of the equation and have a look at...
THE REST OF THE WORLD
Us lot will account for 463 MMT, or around 70%, of world consumption this year. We had 116 MMT (difference due to rounding) of the world stocks at the end of 2009/10, or enough to keep us going for 91 days. We're going to produce 459 MMT, according to the USDA, but remember that this figure is probably overstated by 19 MMT re Russia, Kazakhstan, Ukraine and Europe.
Factoring the 19 MMT overstate in means we're going to eat 23 MMT more wheat than we produce this season, which would drop our reserves below 100 MMT - 76 days worth of supply. And that's without the current market price rationing demand.
In the last big price spike of 2007/08 that figure fell to only 45 days.
In the "awash" and "glut" days of 2009/10 the rest of the world was sat on 94 days worth of wheat, we're still significantly closer to that than we are to 2007/08.
CONCLUSION
Whilst there is certainly some justification in the recent price rally, the fundamentals of supply and demand don't really warrant one of this magnitude. Although there are legitimate concerns over winter wheat planting prospects in Russia this year, European and US farmers will be only too keen to embrace the current price levels with significantly higher sowings. That is exactly what they did for the 2008 harvest which saw EU output up by 26% and US production up by 22%.
Despite London, CBOT and Paris wheat all closing higher on the week, all three actually closed nearer the bottom of the week's trading range than the top.
Is the top already in? That as ever is a difficult one to call, and the funds are certainly likely to have another attempt at sending it higher again. I'm tempted though to say yes, so beware of the "bull trap". Somebody paid GBP169 for November London wheat last week, I guess that could easily fall into the "delusion" category.
There's now 6.4 MMT worth of open interest in November Paris wheat. I think I'd rather be first out than last out if I was sitting on that.
Footnote: I treated myself to an afternoon in the pub Friday, the taxi driver and at least three other people I met with no involvement whatsoever in the grain trade all wanted to talk to me about wheat. That probably tells you all you need to know.
