Big Picture. Wheat may not warm up in 2016

Amidst a supply glut and weak demand, 2015 has been one of the worst years for commodities. Wheat lost over 24 per cent through the year. However, thanks to weather disturbances, sentiment is turning slightly positive in 2016.

A series of strong harvests in major producing and exporting countries, together with lower growth in demand led to global wheat stocks touching record high levels last year. Oversupply, a firming US dollar and intense competition led exporting countries to lower their prices. This sank the CBOT wheat prices to a five-and-a-half-year low at $4.56 a bushel on December 2, 2015.

India’s wheat output is expected to fall for a second straight year in 2015-16 after a series of bumper harvests. Till January 8, wheat acreage was down over 6 per cent to 28.2 million hectares, according to the Ministry of Agriculture. Low acreage and adverse weather conditions in major growing areas of UP, MP and Punjab are likely to limit India’s wheat output at 78-80 million tonnes compared to 88.95 million tonnes in 2014-15. India’s demand is estimated at 93.5 million tonnes. The likely production shortfall of over 10 million tonnes in 2015-16 explains the hardening wheat prices in the country.

Several global factors, too, are aiding the bullish sentiment. Relatively high temperatures in November-December 2015 couldn’t provide proper insulating snow cover for the wheat crops in Russia, Ukraine and the EU. The snow cover helps to protect the crop from being damaged by frost and hail.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) has lowered its production estimate by 5 per cent because of El Nino bouts that are believed to be the strongest in 20 years. Feed demand for wheat is also expected to improve on forecast of increase in number of cattle population and hardening competing corn prices.

However, as on January 1, the Food Corporation’s (FCI’s) wheat stock was higher by 74 per cent at 24 million tonnes, compared to the buffer stocking norm. Thus, the FCI is likely to procure less quantity this year and in case wheat prices rise, it may start offloading its stocks to fight food inflation.

The FCI has so far sold close to 41 lakh tonnes wheat in the current year. It targets 65 lakh tonnes by the end of the current financial year. Continued open market sale by FCI will have a cooling effect on domestic wheat prices.

Latest US Department of Agriculture (USDA) estimates say that global wheat output for 2015-16 year is likely to be 735.38 million tonnes (against demand of 716.14 million tonnes) mainly due to increased production and higher carry-over stocks. The USDA sees ending wheat stocks in 2015-16 at 229.9 million tonnes, thus lifting the stocks-to-use ratio above 30 per cent for the first time since 2009-10.

Argentina, one of the key exporters, has abolished its wheat export duty (23 per cent) to support its farmers and boost competitiveness of its exports. This will see more Argentine wheat coming to international markets.

Helped by a weaker rouble, Russia is all set to overtake the US as the second-largest wheat exporter in 2016. However, this is conditional on the way its geo-political equations with Turkey pan out. Turkey is its largest importer and also holds the key routes for Russian wheat exports. As of now, Russian wheat export to Turkey has been resumed.

Besides, a strengthening dollar will limit US wheat exports to international markets because of lack of buyer interest. Analysts predict that the US stocks-to-use ratio may be the highest in the last six years.

In the light of the above mix of local and global factors, there may be limited scope for an uptick in wheat prices, despite production shortfalls in India and other major producing regions. This is because of comfortable global supplies, strengthening dollar and the Indian government’s determination to contain food inflation. The USDA expects that likely production shortfalls in Canada, India and maybe Australia will be compensated by better-than-expected production in the EU, Russia and the US, and decade-high wheat inventories at 5.78 million tonnes in France, the top European wheat producer.

The author is Vice-President and Head of Agriculture, Food and Retail at Biznomics Consulting.

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