Wheat futures trend downtrend

by World Grain Staff
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by Jay Sjerven

Slackening foreign demand for U.S. wheat, rising estimates of 2004-05 world wheat production, the downward pull of the largest-ever U.S. maize and soybean crops and the current exceptionally good condition of U.S. and other Northern Hemisphere winter wheat crops have kept wheat futures prices depressed and possibly on a course to set further contract lows.

There seems to be little prospect of a significant spike in prices anytime soon, even with commodity funds holding record short positions in wheat, corn and soybean futures. And barring a weather problem in the spring or an unexpected surge in export demand, wheat futures prices could continue to decline through the spring and into the summer, according to analysts interviewed.

Cash wheat premiums on hard red winter wheat and hard red spring wheat, which have held at the highest levels in years, also are expected to decline in coming weeks but remain well above "normal," according to wheat merchants. The cash market for soft red winter wheat is not expected to give much ground until the 2005 harvest, if then.

Looking forward to the year’s second quarter (April-June), which spans the balance of the winter wheat growing season and the start to the spring wheat growing season, Kansas City nearby wheat futures could average between U.S.$2.90 and U.S.$3.10 per bu, (U.S.$106.56 – U.S.$113.91 per tonne). Chicago wheat futures are expected to average between U.S.$2.85 and U.S.$3.05 (U.S.$104.72 – U.S.$112.07 per tonne) and Minneapolis futures between U.S.$3.25 and U.S.$3.45 (U.S.$119.42 – U.S.$126.77). Prices in each market could at times range a bit above or a bit below the projected average ranges, suggested Paul Meyers, vicepresident, commodity analysis, Connell Co., Berkley Heights, New Jersey, U.S.

Steve Freed, vice-president, ADM Investor Services, Chicago, Illinois, U.S., saw a similar scenario, projecting average nearby futures prices in April-June at U.S.$3.10 (U.S.$ 113.91 per tonne) in Kansas City, U.S.$2.95 (U.S.$108.39 per tonne) in Chicago and U.S.$3.30 (U.S.$121.25 per tonne) in Minneapolis.

Both sets of projections envisioned nearby futures prices at levels about the same as or lower than those currently prevailing, with Kansas City contracts seen as the weakest relative to their current prices.

Assuming normal spring weather and harvest yields, prices could sustain further declines during the summer, Meyers suggested. WHAT COULD RALLY WHEAT?

Asked what factors would have to come into play to push wheat futures prices significantly higher in the next three months, reversing current expectations, Meyers said, "Weather problems in the Northern Hemisphere could push prices higher. If there are winterkill problems in the U.S., or if our winter wheat crop comes out of dormancy and runs into a stretch of dry weather, prices would respond."

Similarly, if other principal Northern Hemisphere producing nations experienced weather problems, as they did in 2003, prices could advance, Meyers said.

"And as always, China is a wild card," Meyers added.

"China is expected to have a larger winter wheat crop in 2005 than last year," Meyers said. "My take is China won’t be buying much wheat. CONTRAST WITH A YEAR AGO This year’s downward trend in wheat futures prices contrasted with the advancing market in the winter of 2003-04. At that time, prices derived strength from the strong momentum sustained by U.S. wheat exports because of droughtreduced crops harvested in 2003 by other principal exporting countries, particularly the European Union, Russia and Ukraine.

But the world wheat supply situation is much different this year. World wheat production in 2004-05 was estimated by the U.S. Department of Agriculture at a record 620.89 million tonnes, up 68.19 million tonnes, or 12%, from 552.7 million tonnes in the previous year.

The increase from 2003-04 was the largest year-to-year increase in global wheat production in records going back to 1960-61. The previous record year-toyear increase in production was 61.7 million tonnes from 1975-76 to 1976-77.

The record world crop put an end to a 4-year decline in world wheat stocks. World wheat ending stocks for 2004-05 were projected at 145.29 million tonnes, up 14.38 million tonnes from 130.91 million tonnes the previous year.

The E.U. harvested a record crop in 2004 at 136.73 million tonnes, compared with 106.45 million tonnes the year before. And the former Soviet Union turned out 85.63 million tonnes of wheat, not a record, but up 24.22 million tonnes from 61.41 million tonnes in 2003.

The Southern Hemisphere wheat harvest, with principal producers Australia and Argentina, just concluded. Argentina harvested 16 million tonnes of wheat, 1 million tonnes more than had been projected in December and up 2.5 million tonnes from 2003-04.

Among major wheat exporters, only Australia and the U.S. produced less wheat this crop year than last. The USDA estimated Australian wheat production this winter at 21.5 million tonnes, down 4.73 million tonnes from the record 26.23 million tonnes in 2003-04. The U.S. produced 58.74 million tonnes in 2004, compared with 63.81 million the year before. Many principal wheat importers also had larger crops in 2004 than during the year before, including China. WG

Jay Sjerven is the senior editor markets, for World Grain’s sister magazine, Milling & Baking News. Click here to read the full article