Wheat 2016 upside to persist out to 2020, says BMI

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CBOT wheat prices will remain on an upward trend over the remainder of 2016, supported by lower output from the US and the global wheat market turning to deficit in the upcoming 2016/17 season. Out to 2020, prices will rise moderately as global stocks are at all-time highs, providing a buffer to small market imbalances.

After a strong rally over the last two weeks, CBOT wheat prices will remain supported and average USc513/bushel over the remainder of 2016, BMI Research forecast in its latest report, adding that the global wheat market is expected to to record a deficit in the upcoming 2016/17 season due to lower output from the United States that will support a recovery in wheat prices.

“This recovery will be limited as the market remains well-supplied, with ample completed harvests in Europe and global stocks at an all-time high of 239 million tonnes according to the US Department of Agriculture (USDA). Nevertheless, sentiment is at a bearish extreme with the ratio of long positions to short positions being the lowest in a decade, which could provide additional fuel to a price rally,” the BMI report said.

BMI maintained its forecast for prices to average USc495/bushel in 2017, as it expects the 2016/17 deficit to be largely priced in by the start of the year while global output will recover in 2017/18, improving supply over second half of next year.

“Beyond 2017, we have revised the trajectory of our price forecast and now expect a moderate uptrend as the market will remain largely balanced out to 2020, which will slightly decrease elevated global stocks. The unprecedented size of global stocks underpins the moderate uptrend in our price forecasts. Indicative of this trend, we forecast the global stocks-to-use ratio to decline from 33.7 percent in 2015 to 30.8 percent in 2020, still above the five-year average of 28.8 percent between 2010 and 2014,” the report said.

It said BMI expected global supply to decline by 2.4 percent y-o-y in 2016/17, driven by lower output in the European Union and Ukraine after the two regions harvested record crops in 2015/16. Moreover, the US crop will come in at a 10-year low, weighing on global output. Beyond 2016/17, growth in global wheat production will accelerate, averaging 2.2 percent y-o-y between 2017/18 and 2019/20.

“The bulk of this growth will come from China, where solid growth owing to a stable outlook for the government’s self-sufficiency policy on wheat will enable the country to run continued surpluses, as well as India. Regarding large exporters, we believe Black Sea countries will strengthen their share of the export market over the next five years due to the competitive price of their production and their proximity to large demand regions. Similarly, Argentina and Australia will see solid growth over the coming years as sustained currency weakness maintains production incentives. On the other hand, subdued prices will constrain growth in acreage and input usage in the US and the EU.”

Global wheat demand will grow steadily between 2016 and 2020, driven by rising populations and incomes in large emerging markets such as India, Russia, Brazil and Turkey, BMI forecast wheat consumption in India to grow by 12.5 percent to 2020, compared with its 2015 level, while Russia, Brazil and Turkey will see demand grow by 12.3 percent, 14.7 percent and 12.0 percent respectively. This will represent additional consumption of 19.7 million tonnes over the period, corresponding to 2.8 percent of global consumption in 2015.

“Additionally, we highlight Indonesia, Bangladesh and the Middle East and North Africa (MENA) region as bright spots for wheat consumption growth. We forecast Indonesia’s wheat deficit to be 10.1mn tonnes in 2020 against 7.5mn tonnes in 2015. MENA countries (Egypt, Morocco, Algeria, Iran and Saudi Arabia in particular) will also increase their import requirements as their deficits grow significantly. Moreover, Saudi Arabia’s decision to stop wheat production to curb the depletion of its aquifers will provide an additional boost to import growth,” BMI said in the report.

The risks to price outlook are weighted to the upside, the rerport said.

In March 2016, the Australian meteorological department raised the likelihood of a return of La Nina in end 2016-early 2017 to 50 percent, which would bring dry weather to the Americas and reduce yields in 2017/18. Out to 2020, weak currencies could weigh on input usage in Argentina, Australia and Black Sea countries, limiting growth in exportable supplies. Moreover, poor fiscal conditions constraining government subsidies, as well as potential export restrictions, could prevent Russia and Ukraine from strengthening their positions on the global market.

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