A sharp retreat in wheat prices in the past few months has led millers and processors to hope the so-called "commodities bubble" finally has burst, volatility will diminish and prices will ease further. Economists remain divided on whether the bull run in commodities markets has ended, but wheat processors at least can take comfort in a more balanced supply/demand situation for 2008-09.

At the end of July, indicative export wheat prices, at about $330 per tonne, had fallen by as much as 27% from their record high of $450 in March. By mid-August, prices had rebounded slightly — at $353 a tonne, still historically high — but showed little sign of moving back to or surpassing the record.

The weaker prices were fueled by an increase in expected 2008-09 global wheat production, underscored by year-on-year gains in E.U., U.S., Canadian, Black Sea region and Australian output. In its most recent report, the U.S. Department of Agriculture (USDA) forecast the 2008-09 global crop at 671 million tonnes, a record high and 9.8% higher than the 2007-08 crop.

E.U. output will jump by 20%, to 143 million tonnes versus the weather-ravaged 2007-08 crop of 119 million. U.S. 2008-09 production also rebounded to a forecast 67 million tonnes versus 56.25 million a year earlier.

The Canadian crop should increase by about 5 million tonnes to 25 million. In the Black Sea region, Ukraine’s harvest is expected to jump by 58% to 22 million tonnes, with Russian production forecast to increase by 15% to 57 million.

Even in Australia, which was plagued by a multi-year drought, conditions are improved and production may reach as high as 25 million tonnes. Although the crop is not yet in the bin, the forecast output would be substantially higher than the previous two seasons, which came in at about 13 million and 11 million tonnes.

These production increases will more than offset a decline in Argentina, the USDA said. There, output should reach 13.5 million tonnes versus 16 million in 2007-08.

Global wheat consumption in 2008-09 is projected at a record 650 million tonnes, compared with 622 million in 2007-08. If the harvest and consumption projections are realized, production will outpace use, allowing for the first build-up in stocks since the 2004-05 season.

The USDA projects 2008-09 world wheat ending stocks at 136.2 million tonnes, up from 115.2 million at the end of 2007-08, which was the smallest since the early 1980s. Additionally, the 2008-09 stocks-touse ratio would stand at 21%, up sharply from the record-low 18.5% at the end of 2007-08.

Based on these supply/demand fundamentals, many analysts think the wheat price action seen in 2007-08 is unlikely to repeat itself this season. But they remain cautious and point to factors that could create yet more market turmoil.

Despite a larger global wheat crop, analysts note quality problems are likely to cut into supplies of milling wheat. The large E.U. and Black Sea crops suffered persistent rains, so those supplies should go to feed use and will not address tightness in milling wheat supplies.

The price action in maize (corn) and soybeans also will influence wheat prices. Although their prices also have tumbled from record highs, market uncertainty persists over the effects of maize use for ethanol and Chinese demand for soybeans as the season progresses.

Wheat prices also will respond to global macroeconomic factors. Some think economic weakness in the U.S. and other countries has prompted investors to pull out of commodities, ending the "bubble." But others contend that a weak U.S. dollar, persistent global credit woes and inflation concerns will continue to bolster commodities and could lead to another period of dramatic price surges.

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