Ample wheat supplies pressure prices, but outside markets also exert sway

by Jay Sjerven
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KANSAS CITY — U.S. and world wheat production were expected to decrease in 2009-10, but supplies should be adequate after last year’s record world outturn to keep prices well below all-time highs established last winter. Outside markets will continue to exert considerable sway over wheat price direction, sometimes amplifying the impact of features fundamental to wheat, other times dulling or even pushing against the impact of those fundamentals.

Wheat prices reaching $14 a bu in the case of hard red winter wheat and more in the case of hard red spring wheat encouraged farmers in the United States and other principal wheat-exporting countries to expand wheat area dramatically. World wheat area in 2008-09 was the largest on record. U.S. wheat area in 2008 increased 4% from 2007 and was the largest since 1998. The U.S. record wheat plantings was 88 million acres in 1981.

The world began to build wheat stocks after supplies tightened in 2007-08. World wheat ending stocks in 2008-09 were projected at 147.35 million tonnes, up 23% from 119.36 million tonnes in 2007-08; the latter ending inventory was the lowest since 1980-81. The world wheat ending stocks-to-use ratio loosened to 22.4% from 19.3% in 2007-08; the latter was the tightest in records extending back to 1960-61, or when these data were first calculated.

The U.S.D.A. projected the U.S. carryover of wheat on June 1, 2009, at 623 million bus, more than double the 2008 carryover of 306 million bus. It would be the largest U.S. wheat carryover since 777 million bus in 2002. The recent five-year average U.S. wheat inventory was 484 million bus.

As the world anticipated huge wheat crops in the major producing countries, prices began to tumble in the spring. Wheat prices swiftly lost ground to corn and soybean prices, with those markets not setting their highs until summer.

The plunge in world financial, equity and commodity markets in the fall ensured wheat prices continued to drop sharply. By mid-December, the price of 12%-protein hard red winter wheat in Kansas City had dropped to $6.26 a bu from nearly $14 a bu in April.

"The story for wheat in 2009 is we’re not likely to see a repeat of the huge crops and the big supplies of 2008," said Paul Meyers, vice-president, commodity analysis, Connell Purchasing Services, Berkley Heights, N.J. "The acreage is not going to be as large and we can’t count on a repeat of record U.S. and world wheat yields."

Mr. Meyers pointed out indications were European farmers were reducing wheat area for 2009, albeit marginally, by about 1% to 2%. Mr. Meyers suggested U.S. wheat area in 2009 may drop 5% from 2008, as producers with flexibility to select what crops they plant viewed wheat prices dropping more sharply than corn and soybean prices.

Indeed, the U.S.D.A. inferred a smaller wheat area with its forecast for 82 million bus of wheat to be used as seed for the 2009 crop compared with 88 million bus used to plant the 2008 crop. The department’s initial projection for seed use of wheat for the 2008 crop was 84 million bus, but it reduced its forecast stating lateness of this fall’s row crop harvest limited planting options for producers of both soft red winter and hard red winter wheat.

Mr. Meyers said while U.S. and world wheat supplies were critically tight in 2007-08, there appears to have been a bubble-like quality to the extraordinary run up in wheat prices in the winter and spring as was seen in other surging commodity markets. Conversely, the general plunge in equity and commodity values in recent months may be amplifying the effects on wheat pricing of an improved outlook for U.S. and world wheat supply compared with demand.

Mr. Meyers forecast wheat futures prices in the first half of 2009 to average $5@5.50 in Kansas City, with Chicago prices about 25c below K.C. prices, and Minneapolis prices 40c to 50c above K.C. prices. Mr. Meyers said the projections assumed crude oil trading between $40 and $60 dollar a barrel and the U.S. dollar index trading between 85 and 90.

Matt Beeson of Beeson & Associates, Inc., Crestwood, Ky., said he expected ample supplies of wheat in the United States and around the world to continue in 2009-10. He said he thought $4.50 a bu should capture the downside potential in K.C. wheat futures. The upside risk depends on how the winter wheat crop comes out of dormancy and could be about $6.50 a bu. He said wheat should maintain a "normal" premium to corn and would have difficulty sustaining a significant rally without a push from corn, and corn prices shouldn’t go above the breakeven point for ethanol producers.

"My biggest concern is I’ve had more calls from the industry asking whether they should buy wheat when it was $13 wheat than now when it’s closer to $5 a bu," Mr. Beeson said. "Many wheat buyers seem to have become somewhat lackadaisical. With prices down as much as $10 a bu from their highs in instances, coverage should be extended. There should be less concern about hoping to capture that last 50c of downside potential."

This article can also be found in the digital edition of Food Business News, December 23, 2008, starting on Page 26. Click here to search that archive.

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