Tight world grain supplies still seen at mercy of weather

by Ron Sterk
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KANSAS CITY — Weather has replaced corn as the primary driver of wheat prices over the past several weeks as smaller crops tightened world supplies.

Forecasts of increased demand for corn to make ethanol was credited with driving wheat prices to 11-year highs as the bread grain fought for acres and the global wheat picture was beginning to develop last fall. Since peaking in February, nearby corn futures prices at the Chicago Board of Trade (C.B.O.T.) have dropped more than 25% and wheat has become the price leader as strong demand for a shrinking global supply drove prices to new 11-year highs in late July and again last week.

Prices for soft red winter wheat traded at the C.B.O.T. topped $7 a bu for some contract months the past two weeks due to large foreign purchases of U.S. wheat prompted by weather-reduced crops in several parts of the world.

Wet weather at harvest reduced production from levels forecast earlier in the year in the U.S. hard red winter wheat belt and Western Europe, while hot, dry conditions reduced yields in Canadian and U.S. spring wheat areas and Eastern Europe.

"There is no question that we have seen a reduction in yield potential in the U.S. and Canadian spring wheat areas," said Jon Davis, chief meteorologist at Chesapeake Energy Corp. in Chicago.

In its August World Agricultural Supply and Demand Estimates report, the U.S. Department of Agriculture trimmed its projection of world wheat production by 1.9 million tonnes from its July projection and reduced 2007-08 global ending stocks by 1.8 million tonnes from July, to 114.8 million tonnes. The global stocks-to-use ratio is the tightest in records dating back to the early 1960s.

"E.U.-27 production is lowered 1.7 million tons as persistent, heavy rain during harvest reduces yield prospects in France and Germany, and persistent drought and heat reduce yield prospects in Bulgaria, Hungary and Romania," the U.S.D.A. said.

"The rains caused myriad problems for the winter wheat with reductions in quality and losses in production to a crop that already had a poor growing season," Mr. Davis said of the crop in France and western Europe.

One result of tight global wheat stocks has been increased demand for U.S. wheat, especially soft red winter, because it is one of the few available supplies, despite high prices. The U.S.D.A. estimated U.S. all wheat production at 2,114 million bus in 2007, down 1% from July but up 17% from 2006. Export commitments of all U.S. wheat as of Aug. 9 were 86% ahead of the same period a year ago, the U.S.D.A. said in its most recent weekly export sales report. World demand was highlighted by Egypt’s purchase of more than 500,000 tonnes of U.S. soft red winter wheat last week.

Mixed relief may be expected from the wheat crops in the Southern Hemisphere. Mr. Davis said the Australian wheat crop is much better than a year ago, when it was severely reduced by drought, but Argentina bears watching.

"Argentina is the big problem in the Southern Hemisphere due to reduced intended acreage and poor conditions for the crop that is in the ground," he said.

For other crops, most recent concern has been for soybeans, which are in the critical yield-making stage during August. U.S. soybean production was forecast by the U.S.D.A. at 2.625 million bus based on Aug. 1 conditions, down 18% from the record large 2006 crop due mainly to a 15% reduction in plantings. The average yield was forecast at 41.5 bus per acre, down 1.2 bus from 2006.

The weather pattern in early August was biased toward drier and warmer than normal weather, Mr. Davis said.

"The main impact will be on the soybeans, which are going into the critical pod development stage and yield potential will decline," he said. "The back half of August will be important in determining yields and specific rainfall during this period will be important in the size of the bean crop."

Global 2007-08 oilseed production was projected at 391.3 million tonnes by the U.S.D.A in August, down 4.4 million tonnes from July due to dry weather in China and Canada, and wet harvest weather in the E.U.-27.

The U.S. corn crop generally had good moisture during the critical pollination phase of July. Crop conditions have been better than a year ago in the Great Plains and central Corn Belt, but worse in the northern and eastern Corn Belt, Ohio and Tennessee Valleys and the mid-Atlantic states, the U.S.D.A. said. U.S. corn production was forecast at a record large 13,054 million bus, due mostly to sharply higher plantings this year.

But globally, coarse grain production (which includes corn, sorghum, barley, oats, rye, millet and mixed grains) was forecast at 1,059.8 million tonnes in August, down 5.8 million tonnes from July because of adverse weather in southeast Europe.

This article can also be found in the digital edition of Food Business News, August 21, 2007, starting on Page 15. Click here to search that archive.

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