18 July 2018 ( Lagos ) : Despite ending the 2017/201811 marketing year in a surplus of 15MMT, wheat prices over H1 18 pushed northwards (+9.3%), as market players priced in expectations of a deficit market, driven by an expected surge in consumption amidst higher income induced demand for wheat flour and wheat-based products. Focusing on the review period, the surplus of 15MMT was the result of higher production (+6.2MMT to 758.2MMT) which stemmed from India, Russia, and the Euro area.
While a rebound in yield to normal level12 backed the output growth in the Euro area (+6.2MMT), it was the case of expanded acreage and higher yield that underpinned output growth in India (+11.5MMT) and Russia (+12.5MMT). However, weak output in U.S. (-15.5MMT) and Australia (-10.3MMT) moderated the above mentioned growth. On demand, global consumption over the review period rose +4.3MMT to 743.2MMT with the Euro area, Indonesia, and Russia accounting for much of the increase in demand.
Going forward, the global wheat market is expected to swing into a deficit of 6.2MMT (vs. surplus of 15MMT in the prior season), driven by higher consumption (+7.7MMT to 750.9MMT), particularly in China, India, and US. Currently in China, there is growing interest in specialized flour for pastries and baked goods. This backdrop drives the increase in demand for wheat within the region (+3.0MMT to 120MMT).
Over in India, amidst higher wheat prices, government continued support in the form of supply of subsidized wheat is expected to allay price inflation concerns which in turn would drive sustained consumption of the commodity with projected growth in wheat consumption (+2.2MMT). Elsewhere in the U.S., higher wheat consumption (+1.4MMT) is premised on expected growth in real personal consumption expenditures, driven by rising incomes which should support growth in food service expenditures.
On the other hand, global production of wheat is expected to drop 13.5MMT to a two-year low of 744.7MMT with pressure on supply predominantly from the Euro area, India, and Russia whose output combined is expected to decline 20.2MMT to 314.9MMT. Given the demand-supply picture as well as the expected shift to a deficit market, analysts expect wheat prices to push higher over the rest of 2018.
Source: ARM Securities Limited
Reporting for EasyKobo on Wednesday, 18 July 2018 in Lagos, Nigeria
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