Different roads for wheat and rice

by Morton Sosland
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In a world where computer-driven options trading often is cited as explaining the overwhelming volume of trade in grains and others futures, it may be simplistic to review other factors. Yet, gaining basic understanding of the drivers of price moves in markets like wheat, rice and coarse grains requires a basic look at determinants that measure price effects like the relation of production to demand. It’s almost a given that when the size of a global crop falls short of matching demand that prices will be relatively strong. Of course the opposite also is the case, that when crops exceed demand prices will face downward pressure. It is in crop years when this matrix proves wrong that the opportunity arises for not only understanding the cause for deviations but for capturing the nuances in global and national markets.

At this time nearly half-way through the 2015-16 season, fascinating examples of price movers have emerged. Global wheat prices mostly have felt the weight of a global crop of 732 million tonnes exceeding the expected demand total of 716 million. That weakness has ruled so far this season, especially before the outlook for next year dominates, also is explained by this being the third successive season in which production exceeds demand. This period follows three earlier years in which the opposite was the case, with shortfalls in wheat outturns leading to a notable period of strength. These six years are classic examples of the global supply-demand effect on overall trends in prices of wheat.

Also at hand in 2015-16 is a deviation from this pattern in the global rice market. This is the third successive year in which rice consumption has exceeded the global crop, with use currently estimated at 487 million tonnes and the crop totaling 475 million on a milled basis. Such a drawdown in stocks in the third successive season of the outturn falling short of consumption should lend strength to global prices. But this is not the case as rice prices have been mostly on a downward course. This is particularly surprising because these three years of crops being smaller than use followed six years of rice outturns exceeding demand.

This incongruity largely is explained by the weight of unprecedented stocks in a country like Thailand, a leader in export trade. Acknowledging pressure from unwieldy stocks does not replace the weight that also is coming from mounting evidence that rice is experiencing competition from wheat foods. Yes, food use of both grains is rising with the area’s population, but wheat is cutting into rice usage in places like China and Indonesia.

Nowhere is this rising consumption of wheat foods, mainly bread, of greater significance than in Indonesia. Here is a nation where wheat noodles had vied with rice for favor in the diet, only to experience more recently what has been described as a “voracious” appetite for bread to make sandwiches. The boost in demand reflects its need to rely solely on wheat imports to supply its fast expanding flour milling industry. The result has carried Indonesia to rank as the second largest wheat importer, with takings this year approaching 8 million tonnes, up 25% from four years earlier. Only Egypt will import more.

Looking back a decade, Indonesia imports 60% more wheat and consumes 9% more rice. No other country of anywhere near the same size registered similar growth in wheat demand, a pattern, though, that is beginning to appear in other Asian nations. Cited in studies meant to account for Indonesia’s growth as a wheat market are the rapid economic expansion, tripling in the past decade, and its impact on a larger middle class looking for dietary improvements. Easy-to-eat foods, in contrast to rice and noodles requiring boiling water for cooking, stand out as forces. Seeing these eating shifts spread to neighboring nations hints of a demand revolution overwhelming the surprises already under way.

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