How high can wheat prices climb?
While I was away on holiday, wheat futures climbed past $7 US per bushel and last week they pushed past the previous 1996 highs to post an all-time record above $8 per bu. in Chicago.
This rally has legs, given mounting worries in Australia about lack of rain.
The International Grains Council and the U.S. Department of Agriculture forecasts put Australian wheat production at 22.5 million to 23 million tonnes. But after a dry August, Australian analysts are now talking about a crop closer to 20 million tonnes, and that could shrink further if rain fails to materialize.
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The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
Dry weather is also a problem for Argentina’s recently seeded wheat crop. The slow developing La Nina cooling in the Pacific Ocean is working against a break in the dry trend in the South American country.
Supply is also threatened by speculation that Russia will limit grain exports to ensure an adequate domestic supply and cap food price inflation.
Strong demand is another factor supporting wheat prices. Despite the price rally and sky-high ocean shipping costs, buyers are still lining up. For example, last week the USDA reported weekly wheat export sales of 1.2 million tonnes, well above the 700,000 to 1.1 million tonnes that traders expected. So far this crop year, the U.S. has exported almost seven million tonnes of wheat compared to about five million tonnes in the same period last year. Canadian wheat exports are also ahead of last year.
The grains council estimated world wheat stocks at the end of 2007-08 will fall to 111 million tonnes, the lowest since the early 1980s, but because wheat consumption has grown since then, the stocks-to-use ratio is much tighter now than it was then.
Using the council’s data, stocks-to-use ratio is now a razor thin 18 percent.
Since 2000-01, world production of wheat has fallen short of consumption six times and surpassed it only twice.
These prices will encourage winter wheat seeding in the United States, Europe and the former Soviet Union.
That could dampen wheat prices, but the acreage shift will be limited because of the strong demand for other crops.
Corn prices have fallen from their early summer highs because of the expectation of a large U.S. crop, but the pressure will soon return to ensure an even larger corn crop next year to meet domestic feed, export and ethanol demand.
Biofuel development is going on around the world, creating new demand for grain and oilseeds on top of growing food demand.
This will keep grain prices high and pressure farmers to use more inputs to maximize yields and, therefore, keep the fire under the price of fertilizer and crop protection products.
