If the "cure" for high prices is high prices, the wheat market has recovered from the "disease."

After a nine-month, 50% run-up that set unprecedented highs of $450 a tonne in March 2008, wheat prices over the next nine months tumbled by around 50%. As of late March 2009, wheat prices stood about where they were in July 2007, when the big rally began, at $240 to $250 a tonne.

As the wheat industry knows too well, much of that extraordinary price movement — on the way up and on the way down — was tied to outside factors involving investment sentiment, crude oil prices and inflation/recession/deflation fears. But shrinking surpluses and crop problems also played a major role in driving prices higher, and the response to those high prices helped push the market down.

The race to record highs that began in the last half of 2007 set the stage for a predictable reaction from the world’s wheat producers, who increased their plantings for the 2008-09 season. That increase, along with beneficial growing conditions in many key areas, resulted in a record world wheat harvest.

According to the latest report from the U.S. Department of Agriculture (USDA), global wheat production for the 2008-09 season ending in June will reach 684.4 million tonnes, a 12% increase from the 610 million harvested in 2007-08. On a percentage basis, the increase is the second-largest year-to-year gain since the 1970s; the 2004-05 crop was 13% larger than the previous season.

At the same time, world consumption, after slipping a fraction in 2007-08 as prices moved higher, is forecast to increase in 2008-09, but only by 5.5%, to 648.7 million tonnes. The excess of production over consumption will lift 2008-09 world ending stocks to 155.9 million tonnes, a one-year jump of 30% and the highest level in six years.

The percentage year-on-year stocks increase is the third largest since USDA records begin in 1960. In 1966-67, world stocks rose by 44% from the previous season, to 87.6 million tonnes, and in 1976-77, stocks increased by 47% to 127.4 million.

The big increase in available supplies along with plunging prices has encouraged world trade, with 2008-09 exports forecast to reach a record 125.3 million tonnes, up 7% from 2007-08, amid intense competition. The U.S. will lose market share, accounting for 21% of wheat exports versus 29% a year earlier, primarily because of its strong currency relative to other exporters.

Russia, in particular, has been able to gain advantage in wheat trade, and its total shipments are forecast to reach a record 16 million tonnes, or 13% of the world total. Improvements to Russia’s rail and port capacities have enabled the country to export this record amount.

Because of larger supplies, pressure on prices and higher input costs, 2009-10 plantings and harvest should drop, according to the International Grains Council (IGC). The Council put world production for 2009-10 at 649 million tonnes, 6% lower than in 2008-09, with all major producers down except Argentina, where improved weather should enable a 61% increase, and Australia, which should see an 8% increase.

In addition to a smaller planted area, the IGC noted potential weather problems in key regions. In the United States, drier than normal weather has hurt winter wheat conditions in Texas and Oklahoma, where 57% and 40%, respectively, of the crops were rated poor to very poor as of late March. The IGC, using average abandonment and yield, expects total 2009-10 U.S. output to drop to 59.5 million tonnes from 68 million in 2008-09.

In China, severe drought conditions are threatening crops in eight major wheat producing provinces. Despite recent rains, the Council cut yield forecasts, with the harvest put at 102 million tonnes versus 113 million in 2008-09.

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