Wheat

by Meyer Sosland
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Weather extremes and competition from other crops have taken a toll on wheat harvests around the world during the past year, creating a supply situation that may result in the second straight season of historically tight stocks. In response, prices have steadily advanced and threaten to surpass the records set 11 years ago.

In that season of 1995-96, indicative U.S. wheat export quotes remained above $195 a tonne from October 1995 through July 1996, or 10 consecutive months, and reached a record high of $262 in May 1996.

Now, average prices have been above $195 for 15 straight months, beginning in May 2006. And of those months, 13 have seen prices average above $200, with the high set at $248 a few weeks ago in mid-July, traditionally a period of active harvest pressure on prices.

Prices are expected to remain firm or could press past the record based on crop uncertainties, export demand from customers such as India and Egypt, and the anticipation of a seldom-experienced degree of supply tightness.

According to the U.S. Department of Agriculture (USDA), world stocks of wheat at the end of the 2007-08 season are forecast at 116.6 million tonnes. That estimate would be down 6% from 2006-07’s 124.2 million, which already marked the smallest supply level since 1981-82, when ending stocks were 112.55 million.

Accounting for use, though, world wheat stocks are likely to shrink to a second consecutive historic low. Wheat use in 2007-08 is projected at 619.9 million tonnes, up 200,000 from 2006-07 and second only to the record 624.5 million in 2005-06.

If 2007-08 consumption is on target, the ending stocks-to-use ratio would be 18.9%, down from 20% at the end of 2006-07. The 2006-07 and 2007-08 ratios are the lowest since at least 1960, when USDA database records begin. Even in 1981-82, the last time stocks were lower in volume terms, the stocks-to-use ratio was 25.5%.

The recent downward spiral in global wheat supplies began in the 2006-07 marketing year, led by a drought-induced 61% decline in Australia’s harvest. In fact, among the Big Five wheat exporters, only Argentina saw a year-over-year production increase in 2006-07, while Kazakhstan was the only Black Sea exporter to harvest a larger crop.

Although total global wheat output in 2007-08 is forecast to increase by about 19 million tonnes from 2006-07, harvests in some key areas have been disappointing, weather concerns continue around the globe, and production in other major regions is not yet assured.

In the U.S., the latest estimate of total 2007-08 wheat production is 58.2 million tonnes. Although up 18% from the previous season, the figure is down from earlier expectations, as a late freeze followed by drenching rains and flooding cut output and quality in key sections of the hard red winter wheat belt. As of late July, excessive heat in the north threatened U.S. spring wheat areas, where growers, turning to other crops, cut planted area by 8% from 2006-07.

That same heat also caused concern for spring wheat in Canada, where production already was expected to be down 11% from 2006-07. There, attractive prices for competing crops and weather-related planting delays curbed wheat sowing by as much as 19% to about 6.2 million hectares, the smallest since 1970.

Also in late July, devastating rains hit U.K. and western European wheat areas, prompting cuts in crop estimates and record-high wheat prices in Paris markets. Eastern Europe and Black Sea regions saw excessive dryness cut yields throughout the growing season.

Southern Hemisphere crops apparently have fared better, but even there, fears of weather-related problems had surfaced in late July, prompting some private analysts to cut back slightly on their previous crop forecasts for Argentina and Australia.

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