'China effect' tricked the wheat market on Tuesday

CHICAGO - China's distortion of the global wheat balance sheet may have gone undetected on Tuesday, yet again, and wheat carryout may not be what it seems. When the U.S. Department of Agriculture released its monthly supply and demand forecast on...



CHICAGO - China's distortion of the global wheat balance sheet may have gone undetected on Tuesday, yet again, and wheat carryout may not be what it seems.

When the U.S. Department of Agriculture released its monthly supply and demand forecast on July 12, market-watchers were expecting an increase in global carryout for all three major crops - corn, soybeans and wheat - in the 2016/17 marketing year, which has already begun for wheat.

Corn and soybean carryout increased as expected. Corn tacked on about 3 million metric tons and soybeans just less than 1 million metric tons from the June report.

But to the market's surprise, USDA decreased 2016/17 global wheat ending stocks by just over 4 million metric tons, with the final estimate landing 5 million metric tons below the average analyst estimate in a Reuters pre-report poll.


As a result, Tuesday's trading session posted the biggest daily gains for Chicago Board of Trade wheat since June 8, the day before the front-month contract began its tumble to 10-year lows ( ).

The contract has been trading higher ever since, both on the new carryout figure and the reports from France of lowered crop prospects.

But if you look closer, world wheat stocks actually increased on Tuesday.

In recent years, China has neither imported nor exported any significant amount of wheat relative to what it uses and produces. And the amount of traded wheat pales compared with China's massive grain stockpiles, which have been considerably disfiguring global grain supply.

Many analysts have begun removing China from the global balance sheet to arrive at an "effective" global carryout. Doing so for 2016/17 reveals a 1.4 million-metric ton increase in world wheat ending stocks over USDA's June estimate ( ).

This means that the trade actually had the right idea about increasing stocks going into Tuesday's report. Despite Europe's declining projections, the rise in "effective" world wheat supply was bolstered by an 8 million-metric ton bump in global production, none of which came out of China.

USDA cited an uptick in use as the reason for the lower wheat carryout in 2016/17. Animal feed was by far the biggest contributor on the usage side, which rose by 11 million metric tons over June's forecast.

Looking more closely, precisely half of the increase to feed came from China. The Asian country also added an extra 1 million metric tons onto its food and industrial use as well, accounting for more than half of the global increase in that category.


USDA did state on page 1 of the report that both projected feed and industrial wheat use had risen in China, so one could have seen these stats in the text as well as from looking at the table.

But neither USDA's text nor tables depict the "effective" carryout when omitting China from the balance sheets. This task is entirely up to the users.

It is important to realize that USDA's current figure for 2016/17 wheat carryout is still almost 10 million metric tons above the previous record set last year. So there is still room for error if the European crop ends up even lower, or if problems arise in other locations such as Australia or Argentina, where the crops are still young.

But until China fully changes and implements its policies on stockpiling, global balance sheets will continue to be distorted by Chinese stocks, and analysts and traders will continue to be misled by the numbers unless they make it a habit to investigate the "China effect."

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