Grain Market Review

by Teresa Acklin
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      Prices sink to 10-year lows amid sluggish trade prospects, economic concerns.

   Unusual times have prevailed in the wheat market lately. Global production in 1998-99 is expected to drop from the previous season, use should break above 600 million tonnes for the first time and ending stocks should shrink by more than 5%. But in the midst of these seemingly bullish fundamentals, wheat prices have approached 10-year lows and few expect a significant rebound any time soon.

   For the first two months of the 1998-99 marketing year, the average price of U.S. No. 2 hard red winter wheat, f.o.b. the U.S. Gulf, averaged U.S.$116 a tonne. That was the lowest level since 1986-87, when prices for the season averaged U.S.$110.

   And according to economists at the U.S. Department of Agriculture, the 1998-99 farm price for U.S. wheat should average between U.S.$92 and U.S.$103. Prices have not been that low since 1986-87 and 1977-78, when the farm price for wheat in each season averaged U.S.$99; the last time prices were lower was in 1972-73, when the average was U.S.$82.

   Another sign of strange times was a major anomaly that developed in the U.S. cash wheat market in September. Typically, U.S. wheat in export position at the Gulf commands a premium over the futures price; but for the first time in memory, bids for wheat delivered to the Gulf were as much as U.S.$5.50 a tonne less than the futures price.

   That deviation from “normal” price relationships reflected an ongoing bearish fundamental in the U.S. market: lack of export demand for U.S. wheat. In fact, concerns about sluggish global wheat trade this season help explain the market's weakness.

   Despite prices that are substantially lower — which could be expected to stimulate imports — world trade in 1998-99 is forecast to drop from the previous season. Countries that account for a total of more than 30% of world trade, including Pakistan and countries in the Middle East and North Africa, have enjoyed bumper or record crops in two of the past three years, enabling them to draw on domestic supplies and reduce imports.

   The outlook for Asian wheat imports is of substantial concern in light of the region's economic troubles. Indonesia, for example, is expected to import less wheat, although the actual level will depend on available financing and food aid shipments, as well as internal price developments after the end of wheat flour subsidies.

   Although China may have sustained grain losses because of massive flooding, wheat import levels should remain nearly steady from the previous season. That country will continue to draw down domestic inventories, importing quality as needed.

   Aside from supply issues, trade also is being affected by currency relationships. Although wheat prices are at historically low levels, importers are not necessarily benefiting when purchasing wheat priced in U.S. dollars because their currencies have weakened against the dollar.

   Government policy changes in recent years also are affecting prices. In the United States, for instance, the so-called “Freedom to Farm” act removed the old price floor for wheat, allowing prices to drop to “market clearing levels.” Another program change has encouraged farmers to collect special payments and sell their grain instead of holding it off the market in a loan program.

   Still more critical factors pressuring wheat prices do not relate directly to wheat supply/demand fundamentals. In fact, wheat price performance also has been influenced by concern about the global economic situation and deflation.

   The collapse of the Russian ruble and resulting political and economic uncertainty there, particularly following Asia's woes, raised the specter of a global economic meltdown. The fact that prices for gold, oil and other physical commodities have reached lows unseen in many years also has fostered fears of a deflationary cycle.