It could be a great winter and an OK summer and fall for world wheat prices that will be supported by U.S. corn demand in 2007, says analysis firm Allendale Inc.
It’s unlikely that wheat values will drop as they often do when production rises after a period of high prices.
“With the strain that corn is being put under, both for feed and fuel, it does tend to support the wheat market,” said Joe Victor of Allendale.
“We do anticipate a correction, but not your typical $1-$1.30 (US per bushel) type crash. You’re looking at something that’s probably going to be closer to, at the most, 50 cents or maybe 75 cents lower than where the July futures are.”
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That price slump is likely to occur in August, when new wheat supplies hit the American and world markets.
The market adage is “the answer to high prices is high prices,” meaning that high prices encourage farmers to grow the most lucrative crop, producing ample supplies that drive prices lower.
That phenomenon is happening now all over the world as farmers everywhere seed or plan to seed more acres to wheat to take advantage of high prices.
Ukrainian winter wheat plantings are up about 13 percent, Indian farmers have put in about 15 percent more than average and American and Canadian farmers are expected to increase their spring wheat acres.
“We’re seeing the world respond favourably with higher plantings because the price incentive is there,” said Victor.
This past year’s sudden wheat price surge was due to production problems around the world, most notably in Australia where wheat production fell almost 60 percent from the year before.
U.S. wheat production fell 16 percent due to drought. Winterkill in the Black Sea region reduced production there by about 10 percent and European Union production fell about four percent.
China and North Africa produced more, but not enough to make up for the declines, and China has continued to eat through its wheat stocks.
The United States Department of Agriculture estimates that 2006-07 ending stocks will be down by about 20 percent from 2005-06 to a record low stocks-to-use ratio.
Only 21 percent of the world’s 2007-08 wheat needs can be satisfied by what is left over at the end of this crop year, meaning any production problem could leave the world seriously short of wheat.
That’s why wheat prices are so high. In U.S. dollar terms, farmgate prices have been $4.15-$4.45 this year, versus an average of $3.42 in 2005-06.
But Victor said the same litany of weather problems that propelled prices so high in 2006 is unlikely to occur next year, so all the seeds of a harvest time price crash have been planted.
Fortunately for wheat growers, the new factor of ethanol demand for corn in the coming year should keep that grain’s price well supported.
Because wheat can also be used as a feed, the strong corn price will keep a relatively high floor under wheat prices. Although wheat prices might sag at U.S. winter wheat harvest time, they shouldn’t fall by nearly as much as would be expected.
“You won’t see the huge correction like we’ve seen in the past,” said Victor.
“It’s not like we have a huge surplus (of wheat). Its cousin, corn, has also got tight historical end-stocks to use.”
