Although wheat prices have retreated some from the 10-year highs set in late 2006, price levels remain lofty, and the industry continues to grapple with basic supply/demand fundamentals as well as less traditional factors in the marketplace.
In November, indicative U.S. wheat export prices reached U.S.$215 per tonne, the highest since the June 1996 level of U.S.$227, amid declining 2006-07 global production prospects and shrinking ending stocks. As of mid-March, prices had eased to just above U.S.$200, still the highest levels since July 1996.
The downward price pressure occurred amid small increases in 2006-07 global production and ending stocks estimates. Earlier in the season, analysts forecast 2006-07 output at 585.1 million tonnes, down from 621 million in 2005-06, led by a 14.5-million drop in Australian production because of drought.
More recent projections raised the 2006-07 global wheat crop to 593.1 million tonnes. Although that figure remains significantly below the previous season’s level, the increases from earlier expectations helped push prices a bit lower.
Another factor keeping a lid on prices has been very favorable growing conditions for the 2007-08 marketing year U.S. hard red winter wheat crop. For example, as of late March, progress reports indicated 70% of Kansas wheat was in good-to-excellent condition versus 38% at the same time in 2006, with Oklahoma, Texas and Colorado crops also improved from 2006.
Regardless of the 2007-08 U.S. prospects, global stocks at the end of 2006-07 will remain extremely tight. Those ending stocks recently were projected at 121.2 million tonnes, up from earlier forecasts of 119 million, but down substantially from 147 million at the end of 2005-06. Notably, the stocks-to-use ratio continues at an estimated 19.5%, the lowest since at least 1980.
The tight outlook reflects projections that 2006-07 world wheat use will decline by only 6 million tonnes, to 619 million, or less than 1%. Significantly, 2006-07 wheat feeding is projected to drop by only 3 million tonnes, to 108 million, down less than 3% from the previous year.
When wheat prices rallied in 1995-1996, wheat feeding dropped much more steeply in percentage terms. In the two marketing seasons from 1994 through 1996, feed use declined by 15% and by 7% in the 1995-96 season alone.
The wheat-maize price spread always influences relative feeding levels, and a wheat price above U.S.$200 a tonne typically cuts sharply into wheat demand. But historically high maize prices are expected to limit users’ choices.
As of mid-March, indicative U.S. maize export prices were around U.S.$190 a tonne, only about U.S.$14 less than wheat prices. A more "normal" spread would be about U.S.$50, premium wheat.
An expected surge in maize demand for ethanol in the U.S. has supported the market all season, a new factor influencing price movements in the entire grains-oilseeds complex. U.S. use of maize for ethanol in 2006-07 should be up more than 115% from four years ago and is expected to account for 26% of total maize disappearance, nearly equaling the level of U.S. exports.
Analysts say maize prices should remain firm at least until U.S. plantings are known in the next few months, with maize area expected to jump at the expense of soybean and spring wheat plantings. But a sustained policy push to increase U.S. ethanol output could provide continued support for maize prices into 2007-08.
Another market factor is trading activity by so-called "funds," which, because they handle huge pools of international investment money, significantly influence price movements. The funds’ role in commodity markets has been expanding since 2002, but has become even more active amid recent geopolitical uncertainty, rapid growth in some economies and inflation concerns.