Wheat

by Meyer Sosland
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The 2007-08 wheat marketing year has not been kind to wheat users around the world. And with end-of-season wheat stocks projected at 30-year lows, processors are keeping their fingers crossed for improvements in 2008-09.

A recent report from the U.S. Department of Agriculture (USDA) put 2007-08 wheat-ending stocks at 109.8 million tonnes. And while that figure was up about 3 million tonnes from the previous estimate, it still would be the smallest carryover since 1977-78’s 109.2 million.

Even more worrisome is the stocks-to-use ratio, which is projected at 17.8%, the smallest since at least 1960, the start of the USDA’s historical database. Put another way, carryover stocks represent an annual reserve on hand to cover only 300,800 tonnes of use per day for a world that is consuming 1.7 million tonnes per day in 2007-08.

Declines in planted area and adverse weather in many key growing regions cut harvests this season. And after several consecutive years of consumption outpacing production, the world has been forced to draw down its wheat supply cushion to meet demand.

The bullish wheat situation has coincided with inflationary concerns and bullish sentiment in other physical commodities such as oil and metals. These developments have attracted investors to the wheat market, helping to carry prices to unprecedented highs.

In early October, both Kansas City Board of Trade hard red winter wheat futures and Chicago Board of Trade soft wheat futures peaked at about $350 a tonne. Although prices as of mid-November had retreated by about 18% from those highs, they still remained above the previous record set in 1996 at around $260 a tonne.

The high wheat costs have pressured processors margins and complicated many governments’ efforts to keep consumer food prices in check. In the short term, the Argentine harvest should help to ease some of the supply pressures, and Australia could export 9 million tonnes, despite its devastating drought.

The latest USDA report raised Argentina’s projected output to 15.5 million tonnes, up from 14.5 million earlier, with exports raised to 11 million tonnes. But a mid-November freeze in Argentina’s Pampas pushed down crop condition ratings, which could have an effect on final production numbers.

Beyond the Southern Hemisphere, export supply prospects into 2008 are uncertain. Russia in November instituted a wheat export duty of 10% of customs value, not less than 22 euros, and news reports indicated the government might raise the duty to 105 euros in January or ban wheat exports altogether to curb domestic food price increases. Russia estimates its total 2007-08 exports at 12 million to 14 million tonnes.

In Ukraine, the government earlier in the year instituted wheat export quotas, which essentially serve as an export ban, to run through December 2007. But in October, Ukraine extended the quota to run through March 2008, based on rising domestic prices.

As for the 2008-09 outlook, no official projections for planted area or production have yet been made. One private analyst is confident 2008-09 global harvested area will increase from 2007-08’s 535 million ha because of high prices, but he doubts it will reach the modern peak of 570 million in 1996-97.

Private estimates put U.S. planted wheat area at 25.6 million ha, up 6% from 2007-08, based on high wheat prices. The U.S. winter wheat crop is in the ground, and so far, conditions have been dryer than desired in key hard red winter states.

In Kansas, the largest U.S. producing state, 51% of the crop was rated very poor to fair as of mid-November versus 41% at the same time last year, while wheat rated good to excellent was 49% versus 59% last year.

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