Mecardo Analysis - Putting the D in SND

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By Andrew Whitelaw | Source: USDA

Key points

· Many of the importing nations have attempted to increase their domestic production of wheat.

· The demand for wheat however has outstripped the productive increases.

· Import nations are holding higher levels of stocks.

Supply and demand is the driver of commodity prices. Typically, the focus is on supply, as demand tends to be linear and increases year on year. However, are there factors influencing the demand for global grains in the short term?

Firstly, let's look at some of the world's major importers. I have taken the top importers of wheat over the past five years (ex EU), these are Algeria, Eqypt, Indonesia, Japan, Mexico, Philippines & Turkey.

In recent years Algeria has been attempting to increase domestic production in order to reduce its reliance on overseas imports. During the past two years production have increased to just shy of 4mmt, well above the long-term average (figure 1).

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When we look at the percentage of each importers production to their demand, we can see that these major importers capacity to meet domestic demand has actually fallen (figure 2). During 2011/12 the major importers were able to produce approximately 47% of their overall demand, this year they will be expected to produce 42%. This is due to consumptive demand outstripping advances in production.

The Arab spring uprising was in part caused by increasing food prices, with the staple in those nations being bread. These countries have learnt a lesson from that period, and with generally low prices have increased their stock piles. In figure 1, the end stocks for the combined import nations is displayed, and buffer stocks are now at record levels.

What does this mean?

Demand for wheat in the major importing nations has outstripped production advances. The increase in demand will maintain these nations importance in the global trade.

The low prices have allowed these nations to maintain larger stockpiles of wheat, which helps protect from short term rises in price.

Next week we will cover off on the looming demand issue for grain – the ASF epidemic in China.

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