Global Wheat Outlook: EU Focus

BMI V iew: We believe EU wheat prices have found a bottom around the EUR175/tonne level, in line with our view for global wheat prices to bottom around the USc640/bushel level. Technicals show signs that EU prices are set to turn around, while record import demand from the Middle East will soon deplete EU regional stocks and help prices higher. Ultimately, however, we believe upside risks for EU wheat prices are slightly less significant than for CBOT wheat prices, as import demand will now shift to the Black Sea region and the US.

We believe EU wheat prices have found a bottom around the EUR175/tonne level, in line with our view for CBOT wheat prices to bottom around the USc640/bushel level and for the global market to tighten from September onwards. On the technical side, the weekly relative strength index for EU wheat prices is now in oversold territory, indicating little room for prices to come down in the near term. Net speculative long positions for wheat are also at a record lows, and any concern over global supply will help prices higher in the near term.

On the fundamental side, we believe recent strong import demand from the Middle East will soon deplete EU wheat stocks and tighten the regional market. Industry sources have recently indicated that the EU exported twice as much wheat since the start of the 2013/14 season as it did over the same period in 2012/13. In fact, EU export licenses since July 1 climbed to 4.5mn tonnes, from 2.1mn tonnes over the same period in 2012 and the most since at least 2004.

Bottomed
EU Milling Wheat (EUR/tonne, weekly) & RSI (below)

BMI V iew: We believe EU wheat prices have found a bottom around the EUR175/tonne level, in line with our view for global wheat prices to bottom around the USc640/bushel level. Technicals show signs that EU prices are set to turn around, while record import demand from the Middle East will soon deplete EU regional stocks and help prices higher. Ultimately, however, we believe upside risks for EU wheat prices are slightly less significant than for CBOT wheat prices, as import demand will now shift to the Black Sea region and the US.

We believe EU wheat prices have found a bottom around the EUR175/tonne level, in line with our view for CBOT wheat prices to bottom around the USc640/bushel level and for the global market to tighten from September onwards. On the technical side, the weekly relative strength index for EU wheat prices is now in oversold territory, indicating little room for prices to come down in the near term. Net speculative long positions for wheat are also at a record lows, and any concern over global supply will help prices higher in the near term.

Bottomed
EU Milling Wheat (EUR/tonne, weekly) & RSI (below)

On the fundamental side, we believe recent strong import demand from the Middle East will soon deplete EU wheat stocks and tighten the regional market. Industry sources have recently indicated that the EU exported twice as much wheat since the start of the 2013/14 season as it did over the same period in 2012/13. In fact, EU export licenses since July 1 climbed to 4.5mn tonnes, from 2.1mn tonnes over the same period in 2012 and the most since at least 2004.

Surging Import Demand
EU & US - Wheat Export Licences Since Start Of2013/14 Season (mn tonnes)

Ultimately, however, we believe upside risks for EU wheat prices are slightly less significant than for CBOT wheat prices for several reasons. First, we believe import demand will shift to the Black Sea region in the coming months, as competition over prices intensifies and demand for low-quality (feed) wheat increases. Recent industry sources have shown that EU wheat this season was of much greater quality than in previous seasons (especially in the UK), restricting the amount of output available for the feed sector. On the other hand, production rebounds in the Black Sea region are likely to be particularly strong in Russia, Ukraine and Kazakhstan in 2013/14, and exports from these countries have remained below potential so far. As a result, we expect them to pick up strongly in the coming months, lessening pressure on EU wheat prices.

China Spike
Select Countries - Wheat Imports ('000 tonnes)

Second, major surprises on the import markets this year will come from China and Brazil, which are expected to ramp up exports from the US, boosting global prices but having less of an impact on EU prices. The US Department of Agriculture expects China to import 9.5mn tonnes of wheat in 2013/14, a massive jump from the 2.9mn tonnes in 2012/13. Brazil is also expected to import 7.5mn tonnes, compared with 7.0mn tonnes on average in recent years, as frosts destroyed part of the country's wheat crop and as Argentina's wheat stocks are insufficient to supply its neighbour. We believe the US will remain a key supplier for both countries, and supply on the US market will therefore tighten in the coming months, helping global prices higher in the near term. US soft red winter wheat stocks are expected to fall to 83mn bushels by the close of the season, down 27% year-on-year and representing a stocks-to-use ratio of 14%. This compares with 22% in 2012/13 and 66% in 2009/10.

As a result of these dynamics, we continue to forecast global wheat prices to average USc690/bushel in 2013, implying that prices will average USc677/bushel between September and December. We forecast wheat prices to find some new relief by the summer of 2014 and forecast prices to average USc650/bushel in 2014.

EU Wheat Estimates
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
*(mn tonnes). Source: USDA, FAPRI, IGC, BMI (FY14 = 07/2013 to 06/2014)
BMI EU-27 Wheat Production* 119.8 150.7 139.0 136.6 139.4 133.0 137.5 144.5
USDA EU-27 Estimates* 120.1 151.0 138.3 135.1 137.0 132.0 141.4 na
EU-27 Ending Stocks (USDA)* 12.4 18.9 16.2 11.9 13.8 9.3 11 na
Wheat Area Harvested (mn ha) 24.7 26.7 25.8 26.1 25.8 25.8 26 na
Wheat Yield (tonne/ha) 4.9 5.7 5.4 5.2 5.3 5.2 5 na
% Of Global Production 19.7 22.1 20.2 20.8 19.8 20.3 20 20.5
% Of Global Exports 10.5 17.6 16.1 17.3 10.6 16.0 14.2 na
BMI Global Wheat Production* 612.0 682.7 684.1 648.0 693.8 654.6 691.4 704.8
IGC Global Wheat Estimates* 609.0 686.0 677.0 653.0 695.0 654.0 691.0 na
EU Wheat Calendar
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Note: H=Harvest, P=Planting; Source: BMI, USDA, Eurostat
H H H P P P

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