Old crop wheat price held back by stocks and strong dollar – Market Watch

Reading Time: 3 minutes

Published: February 2, 2006

As wheat futures edge higher on dryness in the U.S. winter wheat belt and frigid weather in Russia, it might seem strange that the latest Canadian Wheat Board Pool Return Outlook featured steady to lower prices.

The reason is related to the rising Canadian dollar and forecasts for large year-end stocks.

Several factors are at play in the world wheat market, but the implications are greatest for new crop prices. The U.S. Drought Monitor report of Jan. 24 showed the severe to extreme drought in Texas, Oklahoma and Arkansas expanding into southern Kansas, which is the leading winter wheat producing state. The U.S. National Weather Service’s long-range forecast calls for drier than normal conditions to continue for the winter wheat area into April.

Read Also

Close-up of a few soft white wheat heads with a yellow combine blurry in the background.

European wheat production makes big recovery

EU crop prospects are vastly improved, which could mean fewer canola and durum imports from Canada.

On the other side of the world, people are wondering how the bitter cold has affected winter wheat in Russia, Ukraine and Eastern Europe. A U.S. Department of Agriculture report notes that crops are mostly covered with snow and damage shouldn’t be widespread.

However, private forecasters in Russia and Ukraine predict significant damage, likening the effect to the frost and ice that damaged crops two years ago.

The true impact won’t be known until spring.

These factors support wheat prices, but the CWB noted that there are ample supplies of low-grade, low-protein wheat.

The International Grains Council backs this up. In its latest report it increased its forecast of world stocks at the end of the crop year by two million tonnes to 133 million, up from 131 million in its November report, but down from 137 million in 2004-05.

The council said the two million tonne increase would accumulate in the hands of the major exporters: Canada; the United States; Australia; Argentina and the European Union. The five exporters are forecast to end the marketing year with 49 million tonnes on hand, three million tonnes less than 2004-05, but about 20 percent more than in each of the previous two years.

The good news is that IGC expects new crop 2006-07 production will drop 20 million tonnes to 595 million, mainly because of problems in Russia and Ukraine and a return to normal yields after strong production this crop year in Canada, Australia and China. However, 595 million tonnes exceeds the five-year average of 591 million.

Still, that is likely to be inadequate to meet all global demand so global stocks should fall by the end of 2006-07. However, this is largely speculation and we’ll know more in a couple of months.

Turning to durum, burdensome stocks are again the watchword. IGC forecasts that durum stocks at the end of this crop year for Canada, the U.S. and European Union combined will total 5.5 million tonnes, a 13-year high.

This surplus will likely cause North American growers to reduce durum acres this spring, but production decreases are not expected elsewhere.

IGC expects EU durum area will shrink further because of falling subsidies, but assuming that Spain’s severe drought will not continue this year, EU production could climb to 8.8 million tonnes, up from 7.5 million last year.

Durum crops in Morocco, Tunisia and Algeria are seeded and enjoying mostly favourable growing conditions, which promise increased production. Crops in Syria and Turkey are also expected to be similar to 2005-06.

The strong Canadian dollar is another negative factor. Last October, hard spring wheat with 14 percent protein on the U.S. west coast sold for about $200 US per tonne, or $236 Cdn with the Canadian dollar valued at about 85 cents US.

In the last week of January, the same wheat class sold at $189 per tonne or $217 Cdn with an 87 cents US loonie.

Forecasters with major Canadian banks expect the loonie will stay strong and could climb to close to 90 cents US this year.

Markets at a glance

explore

Stories from our other publications