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Palouser
Senior Advisor

Catching up on wheat

Sorry didn't answer some questions down below, so I'll give an overall impression of where I think wheat stands. Generalizations.

 

First, the question of a world 'awash' in wheat. At the moment I think the stocks/use for this last market year were projected to be around 23%. The troubles in 2007-8 started when the S/U numbers dipped below 15%. The question is - where to from here? There are a couple of factors to keep in mind. Where are the reserves? And how do they compare to the amount of global trade?

 

The two largest producers, China and India, struggle to maintain adequate reserves for the large percentage of their gargantuan populations that are 'at risk'. Not too many years ago China had 1/3 of the global reserves. India has various reserves announced because of how they run their internal purchasing program for public food programs, but their legal target reserve at the end of the year for that program is only 4 MMT. Their big problem is quality storage when the amounts are much higher soon after harvest. But the point is, some reserves aren't available to the market at any cost.

 

What I'm driving at is the factors affecting S/U can be very dynamic - and who has the available reserves for sale is important. By 2007-8 the 5 major exporters had drawn down reserves, largely from the mistaken belief that the infallible 'invisible hand' would signal production in time by raising prices. My claim was that we were in the danger zone and the 'invisible hand' was not a magician, and normal production variation could not be countered after certain dates.

 

So what are the current factors? I think low relative prices to inputs are dampening global wheat production. There are those that have alternatives and will move away from wheat. 'Normal production variation' is expressing itself. FSU states production is affected, as is Canada's. Global production estimates are on a lowering trend. I'm guessing a relative plateau has been reached in  production with a strong possibility that acres will head down this next year.

 

The jury is still out on Kansas, but rains have damaged some wheat and it remains to be seen if stable weather will be established for harvest. The protein shortage threat, after last year's poor showing in NA and Canada's late and incomplete planting, could encourage planting of hi pro wheat next year if cool weather continues in Canada and N Dakota.The prices could become volatile (already are) for Minneapolis and Kansas City for top protein levels.

 

What it comes down to is the relative change of S/U ratio between the current 23% and 15%. Consumption will continue to increase w/o interruption.

14 Replies
Artifice
Senior Contributor

Re: Catching up on wheat

Per threads of 2 yrs ago, as industrialized cos moved to holding less reserves. so now with developing economies.

 

Storing reserves is VERY expensive, they don’t want the burden.

 

Since last fall wheat goes down rallies some dips deeper, rallies some.

In the old days, wheat oft bottomed around harvest, this year?

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Palouser
Senior Advisor

Re: Catching up on wheat

Pritch, that was your song the summer of 2007. Your recommendations were the definition of disaster. Your generalizations haven't perceptively changed.

 

In fact developing countries that are big producers and big consumers DO want storage capacity. It's well known that China has invested in more storage, India is also looking for more storage. Egypt promotes storage and importation by private companies in addition to national facilities. There are two main reasons for wanting storage. First is for food security and the second is to have commodities to introduce into the market at strategic times to tame market inflation. Standard practice in China and India, and other places as well.

 

There is another problem as well. India and China (and others) have very high internal prices due to tariffs and domestic subsidies to farmers, government purchase floor prices, etc. to promote commodity production. When there are surpluses the subsidies to bring prices down to global trade prices can be almost equal to the value of the commodity in the global market. So, why not store it if the chances are good that the following year the stocks can be utilized? In terms of $ efficiency it can be a bargain.

 

Your claims would only be realistic if there truly was a global free market. There isn't one and there won't be one. The lesson from the 'market' blunder leading to 2007-8 was that stores and security have value.

Artifice
Senior Contributor

Re: Catching up on wheat

Can't help Pritch

but Mr Pauloser look at reality. Holding grain stocks is very expensive, VERY- a financial disaster. Knowledge evolves, evolution.

 Just as industrial nations have reduced stocks to use over time, so will developing countries as transportation and other infrastructure build.

Not quite the same timings but look at  Kmart vs. Walmart 20 yrs ago. Walmart went to just in time inventory, Kmart didn’t and filed for bankruptcy.

Commodities go down in real, inflation adjusted, terms thru time and have storage costs and lost opportunity costs on capital. Added together, those costs are huge. Over time values by owning go to zero because of costs.

Reserves fill an insurance function, insurance net is costly to the buyer. If a developing country wishes to pay those costs, let ‘em, but why should a US farmer pay them? Encouraging a fellow wheat farmers to own his neighboers crop as well as his own is cruel in , sick in my book. Some professional speculators seek to earn the carry, essentially selling insurance premium which thru time adds up to more than the price of a commodity and net wins.

There are bull markets of course but 5$ wheat says produce. What is the carry on 8$ wheat?

Each to his own, The smartest marketing I see is scaled out, and selling additional on any bull news events. That is called not trying to be a hero and selling when they want it. Perpetual bullishness kills.

 

Artifice

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Palouser
Senior Advisor

Re: Catching up on wheat

Pritch, you should send your arguments to the governments of the various countries I've mentioned. I'm telling you what they are doing and their reasons for doing it.

 

IMO, your greatest shortcoming is the ideology that agriculture fits the industrial model. In many ways it doesn't. Just in time delivery implies just in time production. Any farmer can tell you that isn't how it works and 2007 proved it beyond any doubt whatsoever. Unrest in importing countries and the market were the result.  Those are realities we must take into account.

 

Behaviors by states and people trump any ideology.

timetippingpt
Honored Advisor

Re: Catching up on wheat

All 3 of your posts here are simply perfect Palouser. Very well said on all fronts. Thanks for the thoughts.

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Artifice
Senior Contributor

Re: Catching up on wheat

Can't help with Pritch sorry.

Your difficulty maybe the market doesn't trade or care about one farmer or 100, the market trades and distributes the composite crop and S&D.

By nature, business/economic evolution in developing countries learns, as you can if you choose. Brazil, coffee, during their crazzario, crasazzo era, hold a commodity meant losing less, then as they adopted stabilized growth strategies, the cost of owning coffee stocks weighed and they adjusted-a good thing, we want peoples of the world to learn, grow.

Someone self-absorbed with their little fears is unable to make objective decisions. The collective matters. Example, most farms won’t hedge 100% of an expected crop, because of individual risk, so specs earn returns on unhedged crops as prices seasonally fall planting to harvest.

Long term commodities are bear markets which is naturally intuitive to anyone with base economic and science understanding or for others look at the facts, eye it.

The cost of carrying coffee 2000 to 2010 is more then the price of coffee in 2000.

I don’t advise countries, this is international ag econ, by nature they learn, If stocks are up it is because price attracted bigger output.  

 

Perma bullishness maybe become a recogniozed disease, very costy, look at the last 5 years.

We may see new index funds that excliude futures with high contango.

 

Artifice.

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Palouser
Senior Advisor

Re: Catching up on wheat

Coffee held by the seller is a completely different scenario. And coffee is not really the strategic commodity that wheat or other grains for feed and human consumption. Availability of coffee is not the issue in an importing developing country that wheat or rice is.


Lack of market foresight caused instability in countries durring 2007-8. Putting a cost on that doesn't enter into your narrow view of markets. But it certainly does elsewhere.

Artifice
Senior Contributor

Re: Catching up on wheat

Wheat is juts wheat, widely grown and consumed. Price assures it gets grown, there is nothing strategic about it. If one area has troubles, others have better than avg, thus mostly  get a huge world crop each yr. Like all commodities, now and then there is a scarcity, supply and demand respond == self curing.

07 08 or any bull mkt isn’t a cost  it just is.

 

Coffee has more variance in output, and has higher storage than wheat thus historically has bigger moves in bull mkts.

 

A combo of bad WX in many spots caused the 07 08 bull. .

Availability of coffee matters to the populace, big time, addictions

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Palouser
Senior Advisor

No, it was not bad weather ....

..... that caused the 2007-8 market volatility. I had already called attention to the situation just using the general supply and demand and inventory trends by then. I stated clearly that 'normal production variation' put us in the 'danger zone'. You disagreed, for the same reasons you use today. You were completely wrong.

 

Every year has 'bad weather' somewhere. The point is that when inventories are low enough that bad weather can be a deal breaker then it means the market is not valuing risk realistically. Bad weather is a risk. An adequate cushion is a requirement. Thus you have countries storing and promoting storage for strategic reasons and declining 'free market' policies in favor of social and therefore political security. It's a given. One of the reasons free markets in wheat don't really exist as as a general rule.

 

End of rehashing this topic.