Mar 20
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Alef Dias
Grains, Oilseeds and Livestock Weekly Report - 2024 03 20
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Wheat: China brings more bearish fundamentals
- In the last week, Chinese wheat importers have canceled or postponed around 1M mt of cargoes of Australian wheat, according to trade sources. News of the moves came shortly after the US government reported the cancellation of more than 500,000 tons of US wheat exports to China the previous week.
- Cargo cancellations are an indicator of a bearish outlook on the part of buyers, either because they are doing so in order to buy again more cheaply or because there is less demand.
- Looking at the import estimates for the current marketing year, a slowdown in Chinese purchases is expected, given that China is expected to import 2M mt less than in the previous season.
- The outlook for the next harvest could also lead to a reduction in imports. Despite the small change in the planted area, current harvest conditions are satisfactory.
Introduction
Last week, China added downward pressure to wheat contracts by canceling and postponing purchases from the US and Australia. Despite being the largest wheat producer in the world, China's relevance on the demand side has grown dramatically in recent years due to the increase in domestic consumption.
Given this relevance and recent events, let's update our view of Chinese imports, both for this end of the 23/24 marketing year and for the next one.
Purchases canceled and delayed amid low prices
Chinese wheat importers have canceled or postponed around 1M mt of cargoes of Australian wheat, according to trade sources. News of the moves came shortly after the US government reported the cancellation of more than 500,000 tons of US wheat exports to China the previous week.
Traders also reported that commercial companies have vacated shipping slots in several Australian ports that were reserved for cargoes bound for China. The country is the biggest buyer of Australian wheat, and probably booked the cargoes four or five months ago, when prices were higher.
Canceling loads is a bearish indicator. Whether they're doing it to buy again more cheaply or because there's less demand, it's still a bearish view on the market. But will these movements continue in the coming months?
Data still shows strength in demand, but estimates point to a slowdown
Despite the recent cancellations, recent import data points to a strong pace of purchases so far. In the 23/24 crop year, the pace is very similar to the previous crop year, when China imported a record volume of wheat and became the world's largest wheat importer.
Looking at the import estimates for the current season, a slowdown in Chinese purchases is expected, given that China is expected to import 2M mt less than in the previous harvest.
Looking at the import estimates for the current season, a slowdown in Chinese purchases is expected, given that China is expected to import 2M mt less than in the previous harvest.
Fig. 1: Cumulative wheat imports - China (M mt)
Source: Refinitiv
Despite the lower stock-to-use ratio of recent years, the country still has a much more comfortable situation than most of the top importers, which allows China to postpone its purchases if necessary or interesting.
Fig. 2: Ending stocks and Stock/Use (M mt)
Source: USDA
Next harvest also means lower imports
In addition to expectations of higher yields in Russia and the US next season, Chinese production should also be higher than in the 23/24 season, when productivity and quality were heavily impacted by heavy rains at the end of the season.
Despite the slight change in the planted area, current crop conditions are satisfactory. After the strong cold wave in February, which could cause some damage to winter wheat in the advanced stages of development in the south, warm temperatures have returned.
Fig. 3: Wheat Supply and Demand China (M mt)
Source: USDA. *Refinitiv Estimate
Fig. 4: Soil moisture in the main producing regions - China
Source: Refinitiv
Most winter wheat crops in the north will soon come out of dormancy. Rainfall during the winter was close to or slightly above average, providing adequate soil moisture for the vegetative development of winter wheat in the spring.
Fig. 5: Precipitation forecast - China (% of normal)
Source: World AgWeather (wheat production shown inside)
Fig. 6: Temperature forecast - China (difference from normal, ºF)
Source: World AgWeather (wheat production shown inside)
In summary
As one of the world's main importing countries, fundamentals from China continue to have a significant impact on wheat futures prices. Last week's events showed that Chinese buyers have a bearish view of wheat, which should lead to a slowdown in imports in the coming months.
Current estimates corroborate this thesis, as do the prospects for the 24/25 harvest. As a result, China should continue to put downward pressure on wheat prices throughout the year.
Weekly Report — Grains and Oilseeds
Written by Alef Dias
alef.dias@hedgepointglobal.com
Reviewed by Pedro Schicchi
pedro.schicchi@hedgepointglobal.com
pedro.schicchi@hedgepointglobal.com
www.hedgepointglobal.com
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