Tracking international market signals
By Jessica Johnson
UNL Extension Educator, Ag Economics
Economists are often asked: What do you think prices will do next? The truth is, no matter how much anyone watches the market; they can never be 100 percent accurate in predicting where it will go next. So many factors play into supply and demand; it is often difficult to predict which force will have the greatest influence.
Producers are generally well informed about domestic markets. However, identifying and tracking international market signals is more of a challenge, so valuable insight can help in making informed marketing decisions.
Moving into late summer, one market to watch is the international wheat market. Wheat is the No. 1 traded commodity on the world market in terms of volume. The United States is the largest exporter, moving 35 million metric tons (MMT) in 2010, more than half of its domestic production. These facts make U.S. wheat highly dependent on the world market, making it important for those selling wheat to understand the changing market conditions.
A few of the more important indicators are exchange rates, competitive substitutes, available wheat supplies, and competitor production area news.
1. Exchange rates: The strength or relative value of the dollar to other currencies is a key factor in trading products. The stronger the dollar, the more expensive the products are relative to other sellers in the market. As the United States recovers from the economic downturn, the dollar will strengthen, making the sale of U.S. goods more costly to other nations and thus more difficult. Case in point: The relative value the euro is weakening. This implies that the EU-27, a major wheat market competitor, will have a relatively less expensive product for sale and has a trade advantage.
2. Competitive substitutes: Identifying alternatives to wheat is important. To varying degrees, other grains are wheat substitutes. For example, wheat is often substituted for corn in livestock rations in various countries around the world. As the price of corn rises, wheat becomes a cheaper alternative. USDA estimates this increase at 3.2 MMT (WASDE); however industry groups are optimistic that this is a conservative estimate. On the flip side, as prices of wheat rise, consumers of wheat will also be looking for alternative commodities. This is estimated to have a much smaller impact than corn.
3. Available wheat supplies: Supplies are measured in several different ways, such as carry over, stock-to-use ratio, and ending stocks. The important point here is that as the supply of wheat decreases, the price will probably increase. The United States is fortunate that this year drought conditions did not severely damage the U.S. wheat crop. However, Russia has not been as fortunate and has seen a decline production resulting in decreased supplies and increasing prices. The current high wheat prices and record high corn prices influence marketing and production decisions. High prices increase the incentive for producers to sell their product. This potentially reduces stocks into the coming years. With both corn and wheat having high prices, the issue becomes how much of each will be planted. This is tracked by USDA, which publishes a monthly Wheat Outlook report that estimates supplies and ending stocks.
4. Competitor production area news: Knowing what is happening around the world in the major wheat growing and consuming countries is key to understanding potential market movements. Part of what makes wheat an interesting market is that some of the world's leading wheat producers, China and India, are not significant exporters as they use their own production. Russia, another large producer, is an inconsistent exporter. In 2010-2011 Russia only exported 3.9 MMT, compared to 21.3 MMT traded in 2011-2012. The Aug. 10 WASDE report estimated Russian production down 6 MMT from previous estimates. This report also lowered expected exports from Russia by 4 MMT. Uncertainty of export volume creates volatility in the market. Some other developing news in the wheat market is the dismantling of the Canadian Wheat Board, the marketing and pricing monopoly that controlled Canada's wheat market until Aug. 1. Canadian producers now have the ability to market their wheat freely and are no long required to sell the Canadian Wheat Board. This change to a free market may cause some temporary volatility in the market.
These are only some of the factors in today's market. Being aware of what the market is doing makes it possible to make more informed marketing and production decisions. At the end of the day it is all about buying low and selling high.