U.S. wheat prices strong, volatile despite ample global supply

by Editorial Staff
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WASHINGTON — Recent price strength and volatility in wheat and other commodity markets have elicited comparisons to 2008 when many grains set record highs, and last week’s U.S. Department of Agriculture supply and demand data reflecting tighter wheat, corn and soybean stocks did little to dissuade those fears.

New season’s highs were reached last week at all three futures exchanges. December wheat in Kansas City hit a high of $8.21 a bu, up 21% from the recent low of $6.80¼ and up 62% since June 1. Kansas City December last week ended down about 80c from the high.

But current conditions are significantly different from that record year, analysts noted, and prices remain well below record levels. Still, prices for wheat and other commodities are up sharply from just a few weeks ago and have created a challenging environment for buyers of flour and other ingredients.

“The main difference to 2008 is $147 crude oil,” said Paul Meyers, vice-president of commodity analysis, Connell and Co., Berkeley Heights, N.J. Although crude oil prices have increased about 20% since the summer low in August, the current nearby futures price around $87 a barrel still is 40% below the 2008 high.

“The wheat market is in a much different situation,” Mr. Meyers added. “In 2008, U.S. and world wheat stocks were near all-time lows.”

In its Nov. 9 World Agricultural Supply and Demand Estimates, the U.S.D.A. lowered its projection of U.S. wheat carryover on June 1, 2011, by 5 million bus from October, to 848 million bus, 13% below the 2010 level but 177% above the current era low of 306 million bus in 2008. The U.S.D.A. last week projected 2011 world wheat carryover at 173 million tonnes, up 33% from 130 million tonnes in 2007 and up 40% from 124 million tonnes in 2008.

Mr. Meyers said one key factor driving wheat prices this year was weather — current dryness in the U.S. western hard red winter wheat belt, earlier drought in Russia and issues in Ukraine. But fall winter wheat crop condition ratings, which were well below year-ago levels in most hard red states, were not a good indicator of final wheat yields, he noted.

“In 2008 world weather was poor everywhere,” said Steve Freed, vice-president of research, ADM Investor Services, Inc., Chicago.

Also key factors this year were surging corn prices near $6 a bu and soybean prices over $13 a bu, Mr. Meyers said.

“Wheat can’t sell off substantially with those prices,” he noted.

Monthly average all wheat prices have soared since dipping to a 45-month low of $4.16 a bu in June 2010 to a preliminary average of $6.08 in October, a gain of 46%. But the October value was 42% below the all-time monthly high of $10.50 in March 2008.

Following the Nov. 9 U.S.D.A. report, wheat futures prices came off recent highs, although deferred values remained at a significant premium to the nearby, which limited forward buying opportunities.

“Buyers can’t get much ownership very far out,” Mr. Freed noted. “Look for some kind of break.”

Mr. Meyers agreed that buyers should practice scale-down buying and take advantage of dips in futures prices, adding a month’s coverage at each 15c-a-bu break until they have the first quarter covered, since there was limited downside price potential over the next three to four months. After that, he expected increased price weakness may provide more buying opportunities as the Northern Hemisphere winter wheat crop becomes better known.

“Take advantage of a 50c decline,” Mr. Meyers said. “I wouldn’t get greedy.”

Still, some have warned of potential turns in the road to lower wheat prices that may add volatility, such as potential hyperinflation if the economy heats up, demand from Asia, continued strong corn and soybean prices and weather.

Further, Mr. Freed noted fund money, which was just becoming a major factor in commodity volatility during the 2008 record price year, still was a factor, although funds’ recent focus has been more on the “soft” commodities of coffee, sugar and cocoa, as well as cotton, which is at all-time high prices.

For several years, milling executives have encouraged flour and other ingredient buyers to manage risk more aggressively in the face of increasingly difficult market conditions. William R. Stoufer, president of ConAgra Mills, said the message has resonated.

“Ingredient buyers are recognizing the volatility is here to stay,” he said. “The ante continues to go up for what is required for price risk management.Our customers, especially ingredient buyers and finance managers, are seeing price risk management tools as a big competitive advantage in how they do business."

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